Federal Reserve Bulletin, 2012-01
i Federal Reserve BULLETIN Contents Preface ................................................................................................................iii ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings:The TreasuryInternationalCapitalSLT ......................................................................1 ErikaBrandner,FangCai,andRuthJudson,of theBoard’sDivision of InternationalFinance,preparedthisarticle.HughMontagprovidedresearchassistance. ChangesinU.S.FamilyFinancesfrom2007to2010:Evidencefromthe Surveyof ConsumerFinances ..............................................................................29 JesseBricker,ArthurB.Kennickell,KevinB.Moore,andJohnSabelhaus,of theBoard'sDivisionof ResearchandStatistics,preparedthis articlewithassistancefromSamuelAckerman,RobertArgento,GerhardFries,andRichardA.Windle. Useof FinancialServicesbytheUnbankedandUnderbankedandthe PotentialforMobileFinancialServicesAdoption ................................................109 MatthewB.Gross,JeanneM.Hogarth,andMaximilianD. Schmeiser,of theBoard’sDivisionof ConsumerandCommunity AffairspreparedthisarticlewithassistancefromEmilyA.Andruska, AliceM.Cope,AndrewJ.Daigneault,andEvannK.Heidersbach. TheMortgageMarketin2011:HighlightsfromtheDataReportedunderthe HomeMortgageDisclosureAct .........................................................................129 RobertB.Avery,NeilBhutta,KennethP.Brevoort,andGlennB. Canner,of theBoard’sDivisionof ResearchandStatistics,prepared thisarticle.NicholasW.HenningandShiraE.Stolarskyprovided researchassistance. ConsumersandDebtProtectionProducts: Resultsof aNewConsumerSurvey .....................................................................175 ThomasA.Durkin(nowretired)andGregoryElliehausen,of the Board’sDivisionof ResearchandStatistics,preparedthisarticle. LegalDevelopments:FourthQuarter,2011 .........................................................185 LegalDevelopments:FirstQuarter,2012 ............................................................231 LegalDevelopments:SecondQuarter,2012 ........................................................263 LegalDevelopments:ThirdQuarter,2012...........................................................317 Index .................................................................................................................341
iii Federal Reserve BULLETIN Preface TheFederalReserveBulletinwasintroducedin1914asavehicletopresentpolicyissues developedbytheFederalReserveBoard.Throughouttheyears,theBulletinhasbeen viewedasajournalof record,servingtoprovidethepublicwithdataandresearchresults generatedbytheBoard. AuthorsfromtheBoard’sResearchandStatistics,MonetaryAffairs,International Finance,BankingSupervisionandRegulation,ConsumerandCommunityAffairs,Reserve BankOperations,andLegaldivisionscontributetothecontentpublishedintheBulletin, whichincludestopicalresearchandanalysisandquarterly“LegalDevelopments.” Startingin2004,theBulletinwaspublishedquarterlyratherthanmonthly.In2006,in responsetotheincreaseduseof theInternet—andinordertoreleasearticlesandreportsin amoretimelyfashion—theBoarddiscontinuedthequarterlyprintversionof theBulletin andbegantopublishthecontentsof theBulletinonitspublicwebsiteastheinformation becameavailable.Allarticles,ordersonbankingapplications,andenforcementactionsthat werepublishedintheonlineBulletinin2010areincludedinthisprintcompilation. ThetablesthatappearedintheFinancialandBusinessStatisticssectionof theBulletin from1914through2003wereremovedandpublishedmonthlyasaseparateprintand onlinepublication,theStatisticalSupplementtotheFederalReserveBulletin,from2004to 2008.Effectivewiththepublicationof theDecember2008issue,theFederalReserveBoard discontinuedboththeprintandonlineversions. Themajorityof datapublishedintheStatisticalSupplementareavailableelsewhereonthe FederalReserveBoard’swebsiteatwww.federalreserve.gov/econresdata/statisticsdata.htm. TheBoardhascreatedawebpagethatprovidesadetailedlistof linkstothemostrecent dataonitssiteandlinkstootherdataprovidedbytheFederalReserveBankof NewYork, theU.S.Treasury,andtheFederalFinancialInstitutionsExaminationCouncil. OnlineaccesstotheBulletinisfree.Afreee-mailnotificationservice (www.federalreserve.gov/generalinfo/subscribe/notification.htm)isavailabletoalertsubscriberstothereleaseof articlesandordersintheBulletin,aswellaspressreleases,testimonies,andspeeches.Thenotificationmessageprovidesabrief descriptionandalinkto therecentposting. ‰ FederalReserveBulletin:www.federalreserve.gov/pubs/bulletin ‰ DatasourcesforthetablesinthediscontinuedStatisticalSupplementtotheFederal ReserveBulletin:www.federalreserve.gov/pubs/supplement/statsupdata/statsupdata.htm ‰ Subscribetoe-mailnotificationservice:www.federalreserve.gov/generalinfo/subscribe/ notification.htm
1 Federal Reserve BULLETIN May 2012 Vol. 98, No. 1 Improving the Measurement of Cross-Border Securities Holdings: The Treasury International Capital SLT ErikaBrandner,FangCai,andRuthJudson,of theBoard’sDivisionof InternationalFinance, preparedthisarticle.HughMontagprovidedresearchassistance. Understandingandaccuratelymeasuringcross-borderfinancialflowsandpositionshas longbeenimportantforanalysisof portfolioexposures,butthesignificanceof thesemeasureshasintensifiedsincetheonsetof thefinancialcrisisinlate2007,whenpatternsof cross-borderflowschangeddramatically.1IntheUnitedStates,thesystemformeasuring cross-bordersecurityinvestmenthastothispointconsistedof annualsurveysthatmeasure securitiespositionsandmonthlyreportsthatmeasuretransactionsinsecuritiescollected throughtheTreasuryInternationalCapital(TIC)reportingsystem.2Duringthecrisis,estimatedcross-borderpositionsbasedonthemoretimelytransactionsdatacollectedonthe TICSformwereimperfectandinsomecasesmisleading;inthesecases,themorecomprehensivesurveydatalaterrevealeddifferentpatternsthatwouldhaveimprovedunderstandingof vulnerabilitieshadtheybeenknownsooner.Inthewakeof thecrisis,interestin improvingthemeasurementof cross-bordersecuritiespositionsandflowswasachief motivationfortheintroductionof anewTICreportingformforcollectingmonthlyaggregatecross-bordersecuritiespositiondata,theTICSLT,forwhichthefirstwaveof datawas releasedonMay15,2012.3Thisarticlereviewsthegeneralstructureof cross-borderpositionandflowdata,thebenefitsthatthenewSLTcanprovide,andtheincominginformationfromthefirsttworeportingmonthsof SLTdata,SeptemberandDecember2011. Whilesomepatternsandcharacteristicsof theSLTdatawillonlybecomeclearovertime, theSLTdatahavealreadybeguntoprovideinsightsonU.S.andforeigncross-border investmentflowsthataredifferentfromthemonthlyestimatesbasedonexistingflowdata. Cross-borderfinancialflowsaretheothersideof currentaccounttransactions,ortradein goodsandservices:Whengoodsorservicesareboughtbyonecountry,thecostof the itemsacquiredmust,onnet,becoveredeitherbyacorrespondingsaleof goodsorservices orbyfinancialinflows,orsalesof financialassets.FortheUnitedStates,whichhasruna currentaccountdeficitforabouttwodecades,measurementsandanalysisof cross-border financialflowsandpositionsisvitalforunderstandingthesustainabilityof theU.S.current accountdeficit. Cross-borderfinancialflowsoccurmainlyintheformof purchasesandsalesof securities, lendingtobanksandfirms,anddirectinvestment.Thefirsttwotypesof activityaremonitoredthroughtheTICreportingsystem;thethird,directinvestment,whichwewillnot 1 SeeBertautandPounder(2009). 2 TICdata,documentation,andformsareavailableatwww.treas.gov/tic. 3 SLTisanabbreviationfor“SecuritiesLongTerm.”Theform’stitleis“AggregateHoldingsofLong-TermSecurities byU.S.andForeignResidents.”
2 FederalReserveBulletin|May2012 reviewhere,iscollectedandadministeredbytheBureauof EconomicAnalysis(BEA).4 TheTICreportingsystemcomprisesseveralmonthlyformsaswellasannualsurveysand more-extensiveperiodicbenchmarksurveysof securitiesholdings;AppendixA:The TICReportingSystemprovidesanoverview.MonthlyTICestimatesof cross-bordersecuritiespositionsbetweensurveyssufferfromseveralshortcomings;becauseof theseshortcomings,aswellasinterestinmore-comprehensive,timely,andinternationallycomparable data,theSLTwasdevelopedandwasfirstusedinSeptember2011.TheTICSLTbrings U.S.datacollectionintobetteralignmentwithupdatedinternationalreportingstandards, allowsforquarterlypublicationof theU.S.InternationalInvestmentPosition,providessignificantlytimeliermeasurementsof cross-bordersecuritiespositions,andshouldamelioratesome,thoughnotall,of theshortcomingsof thecurrentestimatesbasedonthe monthlytransactionsdata. Thisarticlereviewsfourtopics.First,wereviewthedatacollectionandcompilationmethodologyinplacepriortothedebutof theSLT,includingareviewof theshortcomingsand pitfallsof thosereportsandmethods.Second,wereviewtheSLTmethodologyanditsabilitytoimproveupontheexistingsystem.Wealsodiscussongoingchallengestoreporting andcorrespondingcautionsthatapplytointerpretationof thedata.Wethenreview,based ontheinitialdatareceived,theadditionalcoverageprovidedbytheSLTandthedifferences betweentheSLTdataandthepreviousestimatesbasedoncross-borderflows.Finally,we comparethechangesincross-borderholdingsreportedontheTICSLTforthefourth quarterof 2011withtheestimatesof thesamechangesbasedonthepreviousmethodology.Ingeneral,theSLTdataconfirmtrendsindicatedbytheexistingtransactions-based positionestimates:Cross-borderpositionsinbothclaimsandliabilitieshavelargelyrecoveredfromthepullbacksthatoccurredduringthefinancialcrisis. AlthoughtheinitialSLTdataforSeptemberandDecembershouldstillberegardedas somewhatpreliminary,theSLTreadingsnonethelessindicatechangesinpatternsof securitiesholdingsthatareinsomewaysquitedifferentfromthemovementsestimatedusing otheravailabledata.First,thenewdataindicatethatU.S.investorsshedratherthanaugmentedtheirholdingsof Europeanlong-termbondslatelastyear,atimethatsawunusual strainsinEuropeanfinancialmarkets.Second,thesedataindicatetwotrendsinforeign holdingsof U.S.Treasurysecuritiesinlate2011:astrongeroverallforeignappetiteforU.S. TreasurysecuritiesbutaconsiderablylargerdeclineinChineseholdingsof U.S.Treasury securitiesduringlate2011thanhadbeenestimatedearlier.ThisdatarevisionforChinawas notsurprising:DataforChinaaretypicallyrevisedwhentheannualTICsurveydata becomeavailable.However,themagnitudeanddirectionof therevisionweresurprising relativetoearlieryears,andwiththeSLT,weareabletoseethatchangemuchsoonerthan wehaveinthepast.5 Measuring Securities Positions and Flows Prior to the SLT: The Annual Surveys and the TIC S TheTICSLTwillbeacomplementtothetwoolderTICsystemelementsthatfocusoncollectingsecuritiesdata:theannualsurveys,whichcollectdetaileddataoncross-bordersecu- 4 TheBEAcompilesthemostcomprehensivemeasuresofcross-borderfinancialflowsandpositionsinthequarterlybalanceofpaymentsaccountsandintheannualnetinternationalinvestmentposition.TheBEA’sdataon internationalaccounts,includingthebalanceofpaymentsaccountsandtheinternationalinvestmentposition, arepublishedinboththeBEA’sSurveyofCurrentBusiness(www.bea.gov/scb/index.htm)andonitsInternationalEconomicAccountswebpage(www.bea.gov/bea/di1.htm). 5 ThesedatawerereportedinlateFebruaryaspartoftheMajorForeignHoldersofU.S.TreasurySecurities tableatwww.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 3 ritiespositions;andtheTICS,whichcollectscross-bordersecuritiestransactionsdata.(See appendixAforareviewof allof theTICforms.)Priortotheintroductionof theTICSLT, accurateestimatesof cross-bordersecuritiespositionswereavailablefromthesurveysonly withasubstantiallag.Inthemonthsafterthereleaseof TICStransactionsdataandprior tothereleaseof thenextsurvey,cross-borderpositionscouldbeestimatedusingTICS transactionsandvaluationadjustments.Thesepositionestimates,whichwecallSurvey-S estimates,areusefulbuthavesignificantlimitations.Themethodologyforcalculatingthese Survey-SestimatesanditslimitationsaredescribedmorefullyinthesectionEstimating MonthlyPositionsfromSurveyandTICSData,followingareviewof thefeaturesof the surveydataandof theTICSdata. Measuring Cross-Border Securities Positions: The Annual TIC Surveys Annualsurveysof cross-bordersecurityholdingsprovidethemostaccurateanddetailed informationoncross-bordersecuritiesholdingsbytheUnitedStatesandtherestof the world.6TheTICsystemcurrentlyconductstwosetsof comprehensivepositionsurveys annuallyforbothlong-andshort-termsecurities.7First,theliabilitiessurveymeasuresforeignholdingsof U.S.securitiesattheendof Juneeachyear.Dataarecollectedattheindividualsecuritylevelbycountryof holder,andbytypeof holder(officialorprivate).Second,theclaimssurveymeasuresU.S.holdingsof foreignsecuritiesattheendof December eachyear.Dataarecollectedattheindividualsecuritylevelandbybroadtypeof holder. Forbothsurveys,dataarecollectedatthemarketvalue.Staff membersattheFederal ReserveBankof NewYorkandattheFederalReserveBoardconductextensivereviewsof thedata,includingreporters’valuationsof eachsecurityandreporters’designationof each security’scharacteristics,mostimportantlythesecurityissuer’scountryof incorporation. Inadditiontoanycorrections,therawaggregateddataarealsoadjustedforsecuritiesthat arereportedbybothissuersandcustodians,andtomakereportingsamplescomparable acrossannualandbenchmarkyears.8 The Annual Liabilities Survey Figure1,panelA,showsforeignholdingsof U.S.securitiesbyassettypefortheyears 2003to2011.Mostforeignholdingsof U.S.securitiesareindebt(almost70percentasof June2011),especiallyinlong-termdebt.Treasurysecuritiesandcorporatebondsarethe twolargestcategoriesof debtthatforeignershold.Theshareof long-termTreasurysecuritiesintotalforeignholdingsof U.S.securitieshasincreasedfromabout20percentin 2007tomorethan30percentin2011,mainlyduetoinvestmentof substantialforeign exchangeaccumulationsbyforeignofficialinvestors.ForeignofficialinvestorsarethelargestforeigninvestorsinU.S.Treasurysecurities;theirshareintotalforeignholdingsof U.S. long-termTreasurysecuritieshasgrownfrom62percentinJune2002to77percentin June2011.Short-termdebtholdings(notshown)havebeensmall,generallylessthan 10percentof totalforeignholdingssince2002. Figure1,panelB,reportsthegeographicdistributionof foreignholdingsof U.S.securities. ChinaandJapanarecurrentlythetwolargestforeignholdersof U.S.securities,buthold- 6 Foradditionalbackgroundinformationonthesurveys,seeGriever,Lee,andWarnock(2001);Bertaut,Griever, andTryon(2006);andtheannualsurveyreportsreleasedbytheTreasuryDepartmentavailableat www.treasury.gov/resource-center/data-chart-center/tic/Pages/fpis.aspx. 7 Inaddition,benchmarksurveysfromamorecomprehensivepanelofreportershavebeenconductedperiodically;currently,theyareconductedeveryfiveyears.Themostrecentbenchmarkclaimssurveywasconducted inDecember2011andthemostrecentbenchmarkliabilitiessurveywasconductedinJune2009. 8 Seechapter2oftheannualsurveyreportsformoredetailsonthesurveymethodology.Annualsurveyreports areavailableatwww.treasury.gov/resource-center/data-chart-center/tic/Pages/fpis.aspx.
4 FederalReserveBulletin|May2012 Figure1.ForeignholdingsofU.S.long-termsecurities Billions of U.S. dollars Billions of U.S. dollars A. Holdings by asset type (2003–11) B. Geographical distribution (2007–11) 18,000 18,000 Equity Total other Corporate bonds 16,000 Other Europe 16,000 Agencies Belg, Lux, Switz, U.K. 14,000 14,000 Treasuries Middle East and other Asia 12,000 Japan 12,000 China 10,000 10,000 8,000 8,000 6,000 6,000 4,000 4,000 2,000 2,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Billions of U.S. dollars Billions of U.S. dollars C. Foreign official holdings (2007–11) D. Foreign private holdings (2007–11) Equity 10,000 Equity 10,000 Corporate bonds Corporate bonds Agencies Agencies Treasuries 8,000 Treasuries 8,000 6,000 6,000 4,000 4,000 2,000 2,000 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 ingsbyotherAsiancountriesandMideastcountrieshavealsogrownrapidlyinthepast fewyears.Belgium,Luxembourg,Switzerland,andtheUnitedKingdomcollectivelyhave largeforeignholdingsof U.S.securities;of thisgroup,theUnitedKingdomisthelargest holder,andthethird-largestholderof U.S.long-termsecuritiesoverall.Thelargevolume of holdingsinthisgroupof countrieshighlightsthemainpitfallintheliabilitiessurvey— “custodialbias.”Thecountryattributionof foreignholdingsof U.S.securitiesasreported intheliabilitiessurveysisimperfectbecausemanyforeignownersentrustthesafekeeping of theirsecuritiestoinstitutionsthatareneitherintheUnitedStatesnorintheowner’s countryof residence.Forexample,aGermaninvestormaybuyaU.S.securityandplaceit inthecustodyof aSwissbank.Inthesurveysof foreignholdingsof U.S.securities,sucha holdingtypicallyisrecordedagainstSwitzerlandratherthanGermany.Thiscustodialbias contributestothelargerecordedforeignholdingsof U.S.securitiesinmajorfinancial centers,suchasBelgium,Luxembourg,Switzerland,theUnitedKingdom,andtheCaribbeanbankingcenters.9 Thelargeholdingsof U.S.securitiesbyentitiesinoffshorefinancialcenters—especially thoseintheCaribbean—poseadditionalobstaclestointerpretingforeigninvestors’crossborderfinancialactivitybecausetheseholdingslargelyreflectthesecuritiesportfoliosof thenumerousinvestmentfundsthathavebeenestablishedinsuchoffshorelocationsrather thantheportfoliopreferencesof residentsof thosecountries.Moreover,becausemany 9 Inaddition,thecountryattributionintheliabilitiessurveyiscomplicatedbybearer,orunregistered,securities. BearersecuritiesgenerallycannotbeissuedintheUnitedStates,butU.S.firmscananddoissuesuchsecurities abroad,andtypicallylittleornoinformationisavailableabouttheownersofthesesecuritiesbecausetheyneed notmakethemselvesknown.Thevastmajorityofthedebtsecuritiesattributedtoownerswhosecountryof residenceisunknownintheliabilitiessurveysarebearersecurities. CaribbeanbankingcentersincludetheBahamas,Bermuda,theCaymanIslands,theNetherlandsAntilles, Panama,andtheBritishVirginIslands.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 5 financialinstitutionshaveaffiliatedbankingandnonbankingofficesintheseoffshorelocations,analyzingsecuritiestransactionsthroughthesecenterscanbedifficultwithoutknowingwhetheroffsettingtransactionsareoccurringthroughotherpartsof thefinancial accounts.Forexample,whenentitieslocatedinfinancialcentersbuyU.S.securitiesfrom U.S.broker–dealers,thosetransactionsarerecordedasfinancialinflowstotheUnited States.However,suchtransactionscouldwellbeoffsetbyequallysizablenetoutflowsto thesamefinancialcentersbutreportedinotherpartsof thefinancialaccounts,suchasthe TICbankingdata. Foreignofficialandprivateinvestorshaveverydifferentportfoliosof U.S.long-termsecurities,asseeninpanelsCandDof figure1.Foreignofficialholdingsof U.S.securitiesare dominatedbyTreasurysecuritiesandU.S.agencysecurities,whichtogetheraccountfor about85percentof suchholdings.Incontrast,foreignprivateinvestors’holdingsof U.S. long-termsecuritiesaredominatedbyequityandcorporatebonds,eachof whichaccount forabout40percentof suchholdings. The Annual Claims Survey TheclaimssurveymeasuresU.S.holdingsof foreignsecuritiesattheendof December eachyear.Thesedataarecollectedattheindividualsecuritylevelbycountryof issuerfor U.S.holdingsof foreignbonds,equities,andshort-termdebt.Figure2,panelA,shows U.S.holdingsof foreignsecuritiesbyassettypefrom2003to2010.MostU.S.holdingsof foreignsecuritiesareinforeignequities(abouttwo-thirdsasof December2010),followed bylong-termdebt.Aswithforeignholdingsof U.S.securities,U.S.investmentinshorttermforeigndebt(notshown)issmall,generallylessthan10percentof totalU.S.crossborderportfolioholdings. PanelBof figure2showstheUnitedKingdom,Canada,andJapanassomeof thecountrieswiththelargestU.S.securitiesinvestments.BesidesEurope,Caribbeanbankingcentersarealsoasignificantdestinationof U.S.investmentoverseas,whichreflectsthemain shortcomingintheclaimssurvey—thatis,theclaimssurveyidentifiesthecountryof issue of securitiesbasedontheircountryof legalincorporation,whichmaynotbethecenterof thesecurityissuer’sactivity.Forexample,equityof aU.S.multinationalfirmreincorporatedinBermudaortheCaymanIslandsisofficiallyidentifiedwithBermudaortheCaymanIslandseventhoughitscenterof activityisstillintheUnitedStatesanditsequity tradesonU.S.exchanges.Thus,TICsurveydatabasedonwheretheissuerisincorporated cancauseoddpatternsof U.S.holdingsthatcanbehardtoreconcilewithmeasuresof foreigncountrymarketcapitalization.Forexample,U.S.holdingsof equitiesregisteredinBermudaandIrelandin2010exceeded100percentof thosecountries’domesticmarketcapi- Figure2.U.S.holdingsofforeignlong-termsecurities,2003–10 Billions of U.S. dollars Billions of U.S. dollars A. Holdings by asset type B. Geographic distribution Bonds 12,000 Total other 12,000 Equity Caribbean banking 10,000 Other Europe 10,000 U.K. 8,000 Belg, Lux, Switz 8,000 Japan Canada 6,000 6,000 4,000 4,000 2,000 2,000 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010
6 FederalReserveBulletin|May2012 talization.10Likewise,growthin Figure3.Netcross-borderpurchasesoflong-term specialpurposevehicles(SPVs)in securitiesandcurrentaccountdeficit offshorefinancialcenterscanpose achallengetomeasuringandinter- Billions of U.S. dollars pretingU.S.investors’portfolios.11 Foreign private Net purchases Foreign official Current account deficit* 4,000 Althoughsecuritiesissuedbymul- U.S. tinationalcorporationsreincorpo- 3,000 ratedintheCaribbeanorthrough offshoreSPVsfitthedefinitionof 2,000 foreignsecurities,U.S.investors 1,000 maynotregardthemassuch + becausetheytradeinU.S.dollars 0_ onU.S.exchangesandareoften issuedbyfirmsthatconducttheir 1,000 marketactivitylargelyinthe UnitedStatesandotherwisebehave 2003 2004 2005 2006 2007 2008 2009 2010 2011 likeU.S.firms.Inaddition,since mostCaribbeanbankingcenter Note:Forstackedbars,apositivevalueindicatesforeignholdingsofU.S.securitiesandanegativevalueindicatesU.S.holdingsofforeignsecurities. debtisdollardenominated,growth *Forillustrativepurposes,theU.S.currentaccountdeficitisshownasapositive indollar-denominateddebtsecurivalue. tiesissuedinCaribbeanbanking Source:Forforeignofficialandforeignprivate,andinsubsequentfiguresexcept asnoted,staffestimatesfromdatacollectedthroughtheTreasuryInternational centersobscuresotherimportant Capitalreportingsystem;forU.S.currentaccountdeficit,BureauofEconomic developmentsinthecurrencycom- Analysis. positionof U.S.holdingsof foreign bonds. Overall,bothU.S.cross-borderliabilitiesandclaimsaresubstantial.However,asshownin figure3,netpurchasesof U.S.long-termsecuritiesbyforeignershaveexceededflowsinthe oppositedirection,netpurchasesof foreignlong-termsecuritiesbyU.S.residents.This differencegenerallycoincideswithnetforeignofficialpurchasesof U.S.long-termsecurities.Overallnetcross-borderpurchasesof long-termsecurities—foreignpurchasesof U.S. securitieslessU.S.purchasesof foreignsecurities—thesolidline,roughlybalancethecurrentaccountdeficit,shownwithapositivevalueasthedashedlineinfigure3. Shortcomings of the Survey Data BothliabilitiesandclaimssurveydataarecollectedprimarilyfromlargeU.S.custodian banksandU.S.broker–dealers,butalsofromissuersof U.S.securitiesdirectlyissuedinthe foreignmarketsandfromlargeU.S.-residentendinvestorswhodonotuseU.S.custodians forholdingsof foreignsecurities(forexamplesomepensionfunds,foundations,and endowments).12 Despitetherichnessof theTICsurveydataatthesecuritylevel,majorshortcomingsof the surveydataarethatthesedataareonlyavailableannually,arecollectedatdifferenttimes forliabilitiesandclaims,andareonlyusablewithasubstantiallag:Preliminarydatafrom eachsurveyaretypicallyreleasedeightmonthsafterthesurveydate.Forexample,thepreliminarydatafromtheJune2011liabilitiessurveywerereleasedattheendof Febru- 10 SeetableA14inU.S.DepartmentoftheTreasury,FederalReserveBankofNewYork,andBoardofGovernorsoftheFederalReserveSystem(2010). 11 SeeBertaut,Griever,andTryon(2006). 12 AllU.S.-residententitiesthathavebeencontactedbytheFederalReserveBankofNewYorkmustreport, regardlessofthesizeoftheirconsolidatedholdings.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 7 ary2012,andthepreliminarydatafromtheDecember2011claimssurveyareduetobe releasedattheendof August2012. Measuring Cross-Border Transactions: The TIC S Data Inadditiontothesurveydata,whichmeasurepositionsinsecuritiesatacertainpointin timeinayear,theTICsystemalsocollectsfinancialflowdataontheSform.TheTICS formcollectsmonthlytransactionsdataoncross-borderpurchasesandsalesof U.S.Treasuryandagencysecurities,U.S.corporatebondsandotherbonds,U.S.equities,andforeign stocksandbonds.ThesedataarecollectedprimarilyfromU.S.-residentbroker–dealers responsibleforsecuritiestransactionswithnonresidents,butarealsocollectedfromsome issuers,endinvestors,andmoneymanagers.13Unlikethesurveydata,TICSdataare collectedonlyinaggregatebysecuritytypebutbecomeavailablewithamuchshorterlag— about45days.Thus,TICSdataprovideuswithatimelyandusefultooltogaugecrossborderinvestmentatamonthlyfrequency.Forexample,areU.S.investorsinvesting abroad,inequitiesordebt?AreforeigninvestorsbuyingU.S.securities?Aretheymainly officialorprivateinvestors?TheTICSdatacanhelptoanswerthesequestionsbetween surveys,butitisimportanttonotethreepitfallsof theTICSdatathatcancausemisleadinginterpretationsof cross-borderflows. First,bydesign,theTICSdataarerecordedaccordingtocountryof thefirstcross-border counterparty,notthecountryof theultimatebuyeroractualsellerorissuerof thesecurity. Byrecordingdirecttransactionswithforeignresidents,whoareoftenbroker–dealercounterparties,theTICSdatarecordfinancialtransactionsbetweenthetwocountries,informationthatisimportantfortheU.S.balanceof paymentsstatistics.Asaresult,thegeographicaldistributionof transactionsisdistortedbyactivitythroughfinancialcenters,orsuffers froma“transactionsbias.”14Forexample,whenaGermanresidentbuysaU.S.Treasury bondthroughaLondonbroker,theTICSwillrecordasaletotheUnitedKingdomrather thanGermany.Asaresult,thereportedmonthlytransactionsdataareconcentratedin majorinternationalfinancialcenters.Incontrast,positiondatacollectedbythesurveysand theSLTrecordtheholderandsodonotsufferfromthistransactionsbias. Second,measuredtransactionsdonotfullyaccountfortransactionsmadeonbehalf of officialforeigninvestors.Forexample,if theChinesegovernmentbuysU.S.agencybonds throughanintermediaryinHongKong,theTICS(correctly)willreportapurchaseof U.S.agencybondsbyaprivateHongKongcounterparty.TheTICSdoesnotcapturethe foreign-to-foreigntransactionshowingthefinalownertobeanofficialmainlandChina counterparty;thesedistinctionscanbeimportantwhentryingtoassess,forexample,officialandprivatedemandforU.S.assets. Third,theTICSdatadonotrecordimportantcross-borderflowsinsecuritiesthatdonot passthroughstandardbroker–dealerchannels.Inparticular,theTICScannotaccountfor principalrepaymentflowsof asset-backedsecurities(ABS).Thus,thelargeholdingsof U.S.asset-backedagencyandcorporatebondsresultinoverestimatesof foreignnetacquisitionsof thesesecurities.Similarly,theTICSdoesnotcollectdataoncross-border acquisitionsof stocksthroughmerger-relatedstockswapsorre-incorporationsbecause thesetransactionsareconsidereddirectinvestmenttransactions,forwhichdataare collectedbytheBEA.Forexample,whenaU.S.firmbuysaforeignfirmandthetransactionisfinancedthroughastockswap,orwhenaforeignfirmrelocatestotheUnitedStates, 13 Reportingislegallyrequiredfortheseentitiesiftheirmonthlycross-bordertransactionsareabovethe$50millionthresholdduringthereportingmonth. 14 SeeGriever,Lee,andWarnock(2001)andWarnockandCleaver(2002).
8 FederalReserveBulletin|May2012 U.S.residents’holdingsof theforeignfirm’sstockarenolongerconsideredforeignsecurities,butthechangeinownershipisnotreportedontheTICS.15Toassistusersinobtainingmore-comprehensivenettransactionsdata,FederalReserveBankof NewYorkand FederalReserveBoardstaff constructestimatesof ABSrepaymentflowsandstockswaps, andtheseestimatesarepublishedontheTICwebsite.16 AfinalcomplicationthatcanaffectboththeTICSdataandtheannualsurveydata,and thatalsoaffectstheSLTdata,arisesfromtheactivitiesof U.S.investorswhoentrusttheir securitiesholdingstoforeigninvestmentmanagersorforeigncustodians.Typically,aU.S. investorwhokeepsforeignsecuritiesabroadwilluseadomesticinvestmentmanagerwho willreporttheinvestor’sholdingsontheannualclaimssurveyonbehalf of theU.S.investor.However,if theU.S.investorusesaforeigninvestmentmanager,theseholdingsand associatedsecuritiestransactionsmaybemissedbecausetheTICreportingsystemcancollectdataonlyfromU.S.-residententitiesandcannotcollectinformationfromindividual U.S.persons.Asaresult,U.S.holdingsof foreignsecuritiesmaybesomewhatunderreportedintheTICsystem.Ontheotherhand,if aU.S.residentholdsU.S.securitieswitha custodianabroad,itispossiblethattheseholdingswillbecountedasforeignholdingsof U.S.securitiesbecausetheU.S.custodianwhohassubcustodianresponsibilitiesmaynot knowthattheyareheldonbehalf of aU.S.investor.Thisparticularformof custodialbias canleadtooverreportingof foreignholdingsof U.S.securities. Estimating Monthly Positions from Survey and TIC S Data: The Survey-S Estimates Inordertoobtaintimelierinformationoncross-bordersecuritiespositionsbetweensurveys,wecanestimatemonthlytimeseriesof positionstodatebycombiningtheannualsurveydatawiththeTICSdata.17Themonthlyestimatedpositionsbetweensurveysareconstructedinthreestepsforeachassettypeintheliabilitiesandclaimssurveys,asindicatedin thefollowingequation: x=x (1+V)+S+A t t-1 t t t First,beginningwithdatafromthesurveymonth,x ,thenextmonth’sposition,x is t-1 t adjustedforvaluationchanges,V,usingacombinationof standardpriceindexesof U.S. t orforeignsecurities.Thecombinationof priceindexesischosentoapproximatetheportfoliosheldbyforeignandU.S.investorsasindicatedbyearliersurveys.Next,thecurrent month’snettransactions,S,areadded.Finally,adjustments,A,areincludedtoaccount t t forrepaymentflowsof principalonasset-backedagencysecurities,acquisitionsof equity throughstockswaps,andtransactionsinnonmarketableTreasurybonds.Werefertothese monthlypositionestimatesastheSurvey-Sestimates. AsnotedinBertautandTryon(2007),however,thereareoftenconsiderablediscrepancies betweenthereportedsurveypositionsandpositionestimatesderivedfromthemonthly transactionsdataaspublishedbytheTreasury.Attheindividualcountrylevel,suchdiscrepanciesarelargelyduetothetransactionsbiasinTICSreporting.Constructing estimatedpositionsbasedonthecountry-levelmonthlytransactionsdatatendstogenerate estimatesof holdingsbyresidentsof suchfinancialcenterlocationsthatconsiderablyover- 15 Formoredetails,seeBertautandTryon(2007). 16 Seewww.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx,sections4aand4b. 17 MonthlytransactiondataandannualsurveydataareintegraltotheBEA’sestimateofholdingsintheannual InternationalInvestmentPositions(IIP)publication.TheBEAalsousestheinformationobtainedfromTICS andsurveydataincalculatinginvestmentincomeandfinancialflowsintheU.S.BalanceofPayments statement.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 9 stateactualholdingsasreportedin Figure4.U.K.holdingsofTreasurybonds thenextsurvey,andwilltendto underestimateholdingsbyresi- Billions of U.S. dollars dentsof othercountries. Survey-S estimate 450 Figure4andfigure5illustrateboth Survey 400 sidesof thisproblemforholdings 350 of U.S.Treasurybondsbythe 300 UnitedKingdom,atransactions center,andholdingsof U.S.Treas- 250 urysecuritiesbyChina,whose 200 transactionsareapparentlyoften 150 executedoffshore.Thesolidlines 100 indicateestimatedpositionsbased 50 onthepreviousyear’ssurvey, cumulatedtransactionsfromthe 2003 2004 2005 2006 2007 2008 2009 2010 2011 TICS,andadjustmentsforvaluationchanges.Thedotsindicate Note:IncludesChannelIslandandtheIsleofMan. reportedsurveypositions.Forthe UnitedKingdom,estimatedposi- Figure5.Chinaholdingsoflong-termU.S.Treasury tions,evenafteradjustingforvalu- securities,surveydataandSurvey-Sestimates ationchanges,areconsistently muchhigherthanthesurvey Billions of U.S. dollars results,presumablyrepresenting 1,400 transactionsinU.S.securitiesmade intheUnitedKingdomonbehalf Survey-S estimate 1,200 Survey of thirdparties.Conversely,esti- 1,000 matedpositionsforChinaare muchlowerthanreportedposi- 800 tions,whichreflecttransactions 600 conductedviaoverseasaccounts. Moregenerally,becauseof the 400 transactionsbias,ourpositionesti- 200 matescouldgiveamisleading impressionaboutwhichcountryis 2003 2004 2005 2006 2007 2008 2009 2010 2011 buyingU.S.securities,andhow U.S.andforeigninvestorsare adjustingtheirportfolios. Conflicting Signals: Readings from the TIC S and Survey during and after the Crisis Undertheexistingsystem,althoughtheTICSreportingprovidesuswithawaytoestimate positionsdatabetweensurveys,misleadinginterpretationscausedbythetransactionsbias arenotrevealeduntilthenextannualsurvey.Givensuchlimitations,therehasbeenagrowingdemandformore-accurateandtimelypositionsdatabymarketparticipantsandpolicymakers,especiallyinlightof therecentfinancialcrisis. Figure6providesanexampleof whattheexistingsystemindicatedaboutU.S.investment inforeignbondsin2008,andwhatwecouldhavelearnedearlierhadamore-accurateand timelydatasourcebeenavailable.Asthecrisiswasunfolding,theTICSindicatedthat,on net,U.S.investorsweresharplyreducingtheirholdingsof foreigngovernmentandcorporatebonds,especiallythoseissuedfromemergingmarketeconomies(EMEs).These movementssuggestedthattheEMEsmightfacedifficultyobtainingfundingininterna-
10 FederalReserveBulletin|May2012 tionalmarkets.Infact,thesedata Figure6.ComparisonofSurvey-Sestimatesandsurvey weresomewhatmisleading:Survey dataforchangesinU.S.holdingsofforeignbonds datareceivedmuchlater,inthe summerof 2009,indicatedthatthe Billions of U.S. dollars situationforEMEswaslesssevere Caribbean Advanced foreign economies 200 thanhadbeenindicatedbytheTIC Emerging market economies Sbutthatthesituationforother 100 countrieswasmoresevere.The + 0_ valueof foreignbondsheldbyU.S. investorsfellbyconsiderablymore 100 Survey-S thantheTICShadindicated,and estimated 200 thereductionshadbeenconcenchange in holdings, 2008 300 tratednotintheEMEsbutrather inadvancedeconomies.Thediffer- Change in 400 encebetweenthecountryattribuholdings, 2008 tionof theSurvey-Sestimatesand thatof thesurveydataislikelydue tothetransactionsbiasinthisinstance.Purchasesof EMEsecurities,especiallythose issuedininternationalmarkets,couldhavebeenrecordedaspurchasesof securitiesissued bythecountryinwhichthesaleoccurredwhileredemptionsof thesamebondswouldhave beencorrectlyattributedtotheissuingcountry.Inaddition,thesurveydatarevealedthat actualU.S.salesof foreignbondswereapparentlylargerthanwerereportedontheTICS. Amorerecentexampleismovementsinforeignholdingsof U.S.Treasurysecurities,a topicof interestgiventhelargeissuanceof debtbytheTreasury,largepurchasesof TreasurysecuritiesbytheFederalReserve,andtheannouncementsbysomelargeholdersof U.S. Treasurysecurities,mostnotablyChina,of intentionstodiversifytheirreserveassetholdings,presumablyawayfromTreasurysecurities.TheSurvey-Sestimates,showninpanelA of figure7bythesumof thepalegreenanddarkgreenbars,indicatethattotalforeign holdingsof U.S.Treasurysecuritiesroseabout$500billionin2011—substantiallylessthan the$750billionincreaseovertheprevious12-monthperiod.However,thesurveydatafrom June2011,releasedinlateApril2012andshownbytheblackline,indicatethatforeign holdingsof U.S.Treasurysecuritiesfrommid-2010tomid-2011increasednearlyasmuch astheyhadinthepreviousyear—about$700billion.Thediscrepancybetweentheactual changeinholdingsandtheSurvey-Sestimatesisshownbythepositivemediumgreenbar. BecausevaluationchangesforTreasurysecuritiesaretypicallyfairlysmallrelativetothe totalchangeinholdings,thispositive“gap”indicatestheextenttowhichreportednetpurchasesof Treasurysecuritieslikelyunderstatedactualforeignacquisitions.Thereareseveral possibleexplanationsforthisgapandinvestigationisongoing.First,itispossiblethat Figure7.ChangesinforeignholdingsofU.S.Treasurysecurities Billions of U.S. dollars Billions of U.S. dollars A. Total foreign holdings B. Foreign official holdings Valuation changes 800 Estimated gap 800 Estimated gap Valuation changes Net flows 600 Net flows 600 Total change Total change 400 400 200 200 + + 0_ 0_ 200 200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 11 somecross-bordertransactionsinthehugeTreasurysecuritiesmarketaremissedinthe TICSreporting:In2011,averagedailytradingvolumeinTreasurybondswasontheorder of $500billionormorethantwicetheamountof thegapfortheyearof 2011.18Alternatively,custodialbiascouldbeacomplicatingfactor:If U.S.residentspurchaseTreasury securitiesintheU.S.marketbutthenentrustthemtoforeigncustodians,theTICSwould (correctly)notrecordthepurchasesbutthesurveycouldcountthesecuritiesasheldby foreigners. Foreignofficialpurchasesof Treasurysecuritiesweresubjecttoalargerbutmoretypical revision:AsshowninpanelBof figure7,theSurvey-Sestimateformid-2010tomid-2011 indicatedanincreaseinforeignofficialholdingsof about$200billion,butthesurvey revealedachangeof about$500billion.Foreignofficialpurchasesaretypicallysubjectto suchrevisions,asshownbythepositivemediumgreenbars,becauseforeignofficialentities oftenexecutetheirtransactionsthroughforeignprivateintermediaries.Inthiscase,thegap betweentheSurvey-Sestimatesandthesurveydatasuggestthatforeignofficialacquisitionsof Treasurysecuritiesoverthisperiodwerelikelyquiteabitlargerthanreportedon theTICS,whichbydesignattributessuchtransactionstotheforeignprivatepartiesthat conductthetransactions.Thus,itisimportanttonotethatgapsmayarisefromreporting errorsbutcanalsoresultfromthereportingstructure. The TIC SLT: Building on the TIC S and the Survey Background Analysisof thefinancialcrisisthatbeganinlate2007highlightedtheimportanceof collectingtimelyinformationoncross-bordersecuritiespositions:Asnotedabove,asthecrisis unfolded,accurateandtimelypositioninformationwasnotavailable,andthesurveydata releasedin2009indicatedsomedifferenttrendsthantheearlierTICShadprovided.The differencesbetweentheTICSestimatesandthesurveydatareceivedlaterwereduetothe measurementandestimationproblemsmentionedabove:Transactionsbiaslikelyresulted inunderreportingof purchasesof EMEsecurities,especiallythoseissuedininternational markets,whileredemptionsof thesamebondswouldhavebeencorrectlyattributedtothe issuingcountry.Inaddition,transactionsthatresultedinchangesinU.S.residents’holdingsof foreignsecuritiesappeartohavebeenconductedbyfinancialintermediariesthat werenotpartof thereportingpanelof theTICS. Additionalsecuritiesreportingtoaddresstheshortcomingsof theTICsurveyandTICS hadbeenunderconsiderationpriortothecrisis,butthecrisisacceleratedthedevelopment andintroductionof theTICSLT“AggregateHoldingsof Long-TermSecuritiesbyU.S. andForeignResidents,”whichaddressesmany,thoughbynomeansall,of theseshortcomings.Relativetothesurvey,theSLTwillprovidemuchmoretimelyandfrequentreporting; relativetotheTICS,theTICSLTwillprovidemarket-valuereportsof actualholdings ratherthanflows.Duringtheprocessof developingandintroducingtheSLT,considerable effortsweremadetoensurethatallreportersmeetingthereportingthreshold,especially hedgefunds,privateequityfirms,andothertypesof managedfunds,understandhowto reportcorrectly. Despitetheseimprovements,theSLTwillstillnotbeperfect,andcustodialbiasinparticularwillremainachallenge.Inaddition,theolderelementsof theTICreportingsystem— theTICSandtheannualsurveys—willremainimportantascomplementstotheTICSLT. TheTICSwillremainthetimeliestindicatoravailableof cross-bordersecuritiesflows— 18 SeeSecuritiesIndustryandFinancialMarketsAssociation,www.sifma.org/research/statistics.aspx.
12 FederalReserveBulletin|May2012 actualcross-bordersecuritiesacquisitionsorsales—andwill,alongwiththeSLT,allowus todecomposepositionmovementsintorecordedtransactions,valuationchanges,and “gaps”thatreflectunrecordedtransactionsorerrorsinvaluationestimates.19Italso remainstobeseenhowcloselytheSLTdatawillanticipatethecorrespondingsurveydata. Inprinciple,theSLTandsurveydataforthesamedatesshouldbenearlyidentical,but experiencetodatesuggeststhatreportingdifferencescananddoemerge.Asaresult,the detailedinformationprovidedbythesurveywillremainvaluableasacomplementto theSLT. Therecentfinancialcrisisoffersatleastthreeexamplesof theaddedusefulnessof survey data,eventhoughitarriveswithsuchalonglag.First,thesurveyprovidesthemost detailedinformationavailableaboutthedistributionof investmentflowsbetweenvaluation changes,or“passive”changes,andpurchasesorsales,or“active”changes.Overthecourse of 2008,thesurveyconfirmedthatU.S.investors’holdingsof foreignequitydeclined $2.5trillion,ornearly50percent.Inisolation,thisfiguremightindicatethatU.S.investors wereabandoningforeignequities.However,analysisof pricechangesandpositionchanges atthesecuritylevelrevealedthatthechangewasnearlyallduetodeclinesinvaluation: Afteradjustingforpricechanges,U.S.netsalesof foreignequityamountedtoonlyabout $10billion,orlessthan1percentof theoverallchange.Second,thesecurity-levelreporting onthesurveyalsocanilluminatetrendsincross-borderportfoliocompositionthataredifficulttoidentifyotherwise.Forexample,thesurveydataallowanalysisof exposures,by countryandsector,tosecuritieswhosevaluesarechangingrapidly,suchasABS.20Finally, thesurveywillallowforconfirmationthatpositionsreportedinaggregateontheSLTare calculatedcorrectly.Forexample,itcansometimesbedifficultforreporterstodistinguish betweensecuritiesissuedintheU.S.marketbyforeignentities(consideredtobeforeign securitiesbytheTICsystem)andsimilarsecuritiesissuedbytheU.S.branchesorsubsidiariesof suchforeignentities(consideredtobeU.S.securitiesbytheTICsystem).By examiningthedetailedsecurity-leveldatareportedintheannualsurveys,properguidance canbeprovidedtoreportersregardingclassificationsof suchsecuritiesholdings. Takentogether,thecombinationof themore-frequentpositionsdatafromtheSLT,the monthlytransactionsdata,andtheannualsurveysshouldtogetherresultinamorecompleteandaccuratesystemforrecordingcross-borderflowsandpositions.Althoughthe exerciseof reconcilingchangesincross-borderholdingsof securitiesbetweenrecorded transactions,valuationchanges,andsourcesof “gaps”haslongbeenconductedforthe annualsurveys,withresultingimprovementsinvaluationestimatesandclarificationof reportingresponsibilitiestocollectmissedTICStransactions,themoretimelySLTholdingsdatawillallowforthistypeof analysistobeconductedmorefrequently. Data Collected on the SLT TheSLTrequiresmonthlyreportingonownandcustodialcross-borderpositionsinlongtermsecuritiesatmarketvaluebycountryof holderforU.S.liabilitiestoforeignersandby countryof issuerforU.S.claimsonforeigners.21Inaddition,forliabilities,holdingsmust bedividedintoofficialandprivateholdings.Finally,fortotalpositionsacrossallcountries, reportersmustprovideinformationonseveralmemoitems,includingABSpositions,fund- 19 BeginningwiththeDecember2011report,theTICSLTcollectsdatamonthlyjustastheTICSdoes.However, thefilingdeadlinefortheTICSLTisabitlaterand,atleastintheshortrun,themoreintensivedatareview processrequiredforanewformwillresultinlaterreleaseoftheTICSLTdatathantheTICSdata. 20 SeeBeltran,Pounder,andThomas(2008). 21 Positioninformationforshort-termsecuritiesisalreadycollectedontheTICBforms.SeeappendixAand www.treasury.gov/resource-center/data-chart-center/tic/Pages/forms-b.aspx.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 13 sharepositions,andthesectorof theholder(forliabilities)orissuer(forclaims).22TheSLT formhastwoparts,AandB,forreportingof custodialandissuerorend-investorholdings, respectively.Althoughthestructureof theSLTformparallelstheTICSinmanyrespects, thedifferencesreflecteffortstobringTICreportinginlinewithrecentinitiativesto improveandharmonizedataonthistopicasdescribedinbox1,“TheTICSLTandNew DataInitiatives.”Inparticular,thecategoriesforthesectoralbreakdownswereselectedto meetthestandardsestablishedinthesixtheditionof theBalanceof PaymentsandInternationalInvestmentPositionManual,6thedition(BPM6),andtheseparationof holdingsinto ownandcustodialholdingsparallelsreportingontheannualTICsurveys. TheSLTwillprovideconsiderablytimelierpositiondata,thoughinitiallynotquiteas timelyastheestimatesnowavailablebycumulatingadjustedTICSdata.ThefirsttwoSLT reportdateswereSeptember30andDecember31,2011;beginningwithJanuary31,2012, reportdateswillbemonthlyforthelastbusinessdayof themonth,withreportsdueto FederalReserveBanksbythe23rdcalendardayof thefollowingmonth.Aswithanynew reportform,thelagfordatareleaseswillinitiallybesomewhatlongerasmoreextensive validationchecksareconductedandreportingconsistencyisreviewed.Therefore,thecurrentreleaseincludesfullsecuritytypeandcountrydatafromthetwoinitialfilingsof the TICSLT,forSeptemberandDecember2011.Asreportersbecomemoreaccustomedtothe form’srequirementsandprocedures,weanticipatethatthereviewandvalidationprocess willbequickeranddatareleasewilloccurmorepromptly.Inthelongerrun,publicationis anticipatedwithanadditionalone-monthtotwo-monthlag,oratotalof twotothree monthsafterthereportdate.WeexpectthatSLTdatawillbeavailableforuseinquarterly internationalinvestmentpositioncalculationswithalagof lessthanonequarter,asspecifiedinBPM6,bytheendof 2012. InadditiontothenewitemscollectedontheTICSLT,twofactorshaveresultedinasignificantexpansionof theSLTreportingpanelrelativetotheTICannualsurveypanel. First,thereportingthresholdisabitdifferent,andisgenerallylower.Second,significant outreacheffortsweremadeinordertoinformmanagersof hedgefunds,privateequity funds,andothertypesof managedfundsof potentialreportingresponsibilities.Aspartof theseefforts,instructionsandothermaterialstoclarifythereportingresponsibilitiesof suchentitiesweredeveloped.23Thesefactorsresultedinanincreaseinthenumberof reportersfromabout100oneachof theannualsurveypanelstoover300ontheSLT. A First Look at the SLT Data New Reporting Asnotedabove,substantialeffortsweremadetoensurethatalleligiblereporterswere familiarwiththeTICSLTformanditsinstructions,andthereportingpanelexpandedby over200reporters,ormorethandoublethenumberof recentsurveyreporters.Thefirst fewreportingdatesindicatethattheseeffortsresultedinincreasedreportingontheorderof 2½percent—about$300billion—forliabilities,and6percent—orabout$400billion—for claims.Table1presentsSLTtotalsfortwosetsof reporters:allreporters,andonlythose whoreportedontheSLTbutnotontheannualsurveys.Asshownintheupperpanel,these newreporters’positionswereconcentratedinequitiesand,toalesserextent,incorporate 22 Formsandinstructionsareavailableatwww.treasury.gov/resource-center/data-chart-center/tic/Pages/formsslt.aspx. 23 Thesematerials,whichincludeFAQsandflowcharts,areavailableatwww.treasury.gov/resource-center/data-chartcenter/tic/Documents/slt_faqs.pdfandwww.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_ flowcharts.pdf.
14 FederalReserveBulletin|May2012 Box 1. The TIC SLT and New Data Initiatives AlthoughresearchershavelongbeenawareoftheinformationalgapsinthemonthlyTICS andthedisparitiesbetweentheTICSestimatesandannualsurveydata,concernsabout reportingburdenandcoststodatacompilersweresufficienttopreventtheintroductionof anew,improvedTICreport.Instead,effortswerelargelydevotedtoincrementalenhancementstotheexistingdatacollectionsystem.Forexample,reporterswererequiredtoidentifytransactionsinasset-backedsecurities(ABS)ontheTICS,estimatesofrepayment flowsonforeignholdingsofABSweremadeavailabletodatausers,andadditionaltabulationsofthesurveydatawereaddedtotheannualsurveyreports. However,thefinancialcrisisof2008alteredthebalanceofprioritiesbetweenconcerns overreportingburdenandtheneedformorecompletefinancialinformation,andhighlightedtheimportanceofmovingtheTICformsintoclosercompliancewiththeGroupof Twenty(G–20)datainitiatives,especiallythosestressingthecollectionofmorecomplete globalfinancialdata.Inparticular,thecrisisrevealedthevalueofaformsuchastheSLT. Thecrisisshowedtheimportanceofunderstanding,onatimelybasis,howcross-border portfolioinvestorsarerespondingtochangesandhowexposuresarebuildingintheglobal financialenvironment. InNovember2009,intheaftermathoftheglobalfinancialcrisis,theG–20DataGapsInitiativesweredevelopedbytheFinancialStabilityBoardSecretariatandInternationalMonetaryFund(IMF)staff.1TheseinitiativeswereendorsedbytheG–20FinanceMinistersand CentralBankGovernorsandbytheInternationalMonetaryandFinancialCommittee.The G–20meetingsthatoccurredaspartoftheDataGapsInitiativesemphasizedtheimportanceofinternationalcollaborationandcoordinationtobetterassesscurrentversus desireddatacollection,risksposedtoinstitutions,especiallyglobalsystemicallyimportant financialinstitutions,andhowtooptimallyallocateresourcestocloseexistingdatagaps. Thesekeycomponentsarereflectedinthe20recommendationsthatweregeneratedby themeetings.Therecommendationsbalancedthedesiretoclosegapsinfinancialdata reportingagainstvariousconstraintstodatacollection,includingreportingburden,confidentialityconcerns,andlegalconstraints. Ingeneral,therecommendationsfocusedonobtainingmore-specificdatainseveral dimensions.Inparticular,itwasarguedthatdatareportedonaresidencebasis,disaggregatedbycountry,sector,instrument,maturity,andcurrencydenominationshouldfacilitate theidentificationofinterestrateandexchangeraterisks,maturitymismatchesorfunding gaps,andthepotentialforspillovers. InordertomovetheTICreportingsystemintoclosercompliancewiththeG–20datainitiatives,thenewformSLTwasintroducedinSeptember2011. SLT’sLinktoRecommendations ThenewSLTformaddresses3ofthe20recommendationsoftheG–20financeministers andcentralbankgovernorsintheMay2010reportTheFinancialCrisisandInformation Gapsthatpertaintocross-bordersecuritiespositions. First,centralbanksandstatisticalofficesaretoparticipateintheBankforInternational Settlements(BIS)datacollectiononsecurities.2Thisrecommendationisquitegeneral.As notedelsewhere,theSLTwillprovidemoretimely,frequent,andreliableestimatesofsecuritiesholdings,andthuswillcontributetomore-completeglobalcross-borderdatasets. BecausetheSLTcollectsholdingsofsecuritiesatmarketvalue,theSLTincombination withthemonthlytransactionsdatawillalsoprovideabetterapproximationofvaluation changes. Second,countriesaretoworktowardreportingtheirinternationalinvestmentpositions (IIPs)quarterlyand,totheextentpossible,reportingtheirIIPsinaccordancewiththestandardsestablishedintheBalanceofPaymentsandInternationalInvestmentPosition Manual,6thedition(BPM6).3TheUnitedStatesisalreadyinpartialcompliancewiththeIIP “pipelineproject,”whichaimstoincreasethenumberofcountriesreportingannualand continuedonnextpage
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 15 Box 1.—continued quarterlyIIPdatatotheIMF.TheSLTwillmovetheUnitedStatesintofullcompliancewith theBPM6reportingtimelineofquarterlyreportingwithamaximumlagofonequarter. BPM6alsoemphasizessectorofissuer(forU.S.portfolioliabilities)andsectorofholder (forU.S.portfolioassets).The“ofwhich”memolinesontheSLTwillmovetheUnited StatesintoclosercompliancewiththeBPM6sectorrequirements. Third,thereportmoregenerallyrecommendedimprovedsectoralbreakdownsinorderto narrowfinancialdatagaps.4Thekeyrecommendationfromtheearlyreportsemphasizes theimportanceofimprovingdataoninternationalfinancialnetworkconnectionsandmonitoringthevulnerabilityofdomesticeconomiestoshocks.InadditiontosatisfyingBPM6 sectorrequirements,the“ofwhich”itemsfromtheSLTallowsforanalysisofexposuresto, forexample,financialornonfinancialormunicipalissuers,andthemoretimelymeasures ofcross-bordersecuritiesholdingswillstrengthencoverageofthe“restoftheworld”sectoroftheU.S.nationalbalancesheetandflowoffundsdata. 1 SeeIMFandFinancialStabilityBoardSecretariat(2009,2010)andIMF(2011). 2 Thisrecommendationisnumber7inthereport. 3 Thisrecommendationisnumber12inthereport. 4 Thisrecommendationisnumber15inthereport. bonds;holdingsof agencyandTreasurysecuritieswerelittleaffectedbytheincreasedoutreachandclarificationof reportingresponsibilities.Likewise,thenewreportingisgeographicallyconcentrated:Of the$293billioninnewreportingonforeignholdingsof U.S. securities,about$225billion,ornearly75percent,isinEuropeandtheCaribbean,which Table1.TICSLTreportingbyreportergroup,securitytype,andresidenceofownerorissuer Billionsofdollarsexceptasnoted,December2011 Reportingbynew Reportingbynewreporters Totalreporting SLTreporters asshareoftotalreporting Totalliabilities 11,910 293 2.5% Treasurysecurities:Official 3,257 0 0.0% Treasurysecurities:Private 1,091 6 0.6% Agencysecurities:Official 615 0 0.0% Agencysecurities:Private 436 2 0.5% Corporatebonds:Official 98 0 0.0% Corporatebonds:Private 2,562 30 1.2% Corporatestocks:Official 594 31 5.2% Corporatestocks:Private 3,258 223 6.8% Totalclaims 6,575 390 5.9% Governmentbonds 363 8 2.2% Corporatebonds 1,732 70 4.0% Corporatestocks 4,480 312 7.0% Byresidenceofownerorissuer Totalliabilities 11,910 293 2.5% Europe 4,339 99 2.3% Canada 547 21 3.8% LatinAmerica 451 4 0.9% Caribbean 1,448 125 8.6% Asia 4,729 29 0.6% Allother 396 14 3.5% Totalclaims 6,575 390 5.9% Europe 2,876 89 3.1% Canada 693 37 5.3% LatinAmerica 394 5 1.3% Caribbean 1,032 227 22.0% Asia 1,153 16 1.4% Allother 428 16 3.7%
16 FederalReserveBulletin|May2012 togetheraccountforslightlylessthanhalf of totalholdings.Of thenearly$400billionin newreportingonU.S.positionsabroad,about$225billion—overhalf—comesfromnew reporters’Caribbeanpositions,whichaccountforabout15percentof suchpositions overall. Aggregate Data in Comparison with Recent Survey Data Holdings of U.S. Securities by Foreign Investors TheSeptemberandDecember2011SLTdata,intermsof level,orposition,arebroadlyin linewiththemostrecentavailablesurveydata,fromJune2011forliabilitiesandfrom December2010forclaims. Figure8displayssurveydataandSurvey-Sestimatesof U.S.liabilitiesforforeignresidents throughSeptember2011andSLTdataforSeptemberandDecember2011.ThelinesindicateSurvey-Sestimatesfortotalforeignholdings.TheblackandgreencirclesindicatesurveyandSLTreadings,respectively.24Thus,theverticaldistancebetweenthegreencircles andtheblacklinesindicatesthedifferencesbetweenSLTdataandourSurvey-Sestimates basedontheJune2011liabilitiessurvey. ForTreasurybonds,theSLTdataindicateholdingsthatareabitbelowtheSurvey-Sestimates,but,liketheestimates,indicatethatforeignholderscontinuetoincreasetheirholdings.ForU.S.governmentagencybonds,theSLTdataareabitabovetheSurvey-Sesti- Figure8.SurveyandSLTdataandSurvey-SestimatesofforeignholdingsofU.S.long-termsecurities Billions of U.S. dollars Billions of U.S. dollars A. U.S. Treasury bonds B. U.S. agency bonds 5,000 Survey-S estimate 1,400 Survey SLT 4,000 1,200 3,000 1,000 2,000 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Billions of U.S. dollars Billions of U.S. dollars C. Corporate bonds D. Equity 3,500 4,000 3,000 3,500 2,500 3,000 2,000 2,500 1,500 2,000 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 24 Asintheearlierfigures,thepositionestimatesarecalculatedasthevaluation-adjustedlevelfromtheprevious periodplusTICStransactionsadjustedforABSrepaymentsandstockswaps.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 17 Figure9.ForeignholdingsofU.S.long-termsecurities,selectedcountriesandsecuritytypes Billions of U.S. dollars Billions of U.S. dollars A. Treasuries, Belgium & Luxembourg B. Agencies, Belgium & Luxembourg 300 120 Survey-S estimate 250 Survey SLT 200 90 150 60 100 30 50 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Billions of U.S. dollars Billions of U.S. dollars C. Treasuries, U.K. D. Corporate bonds, Cayman Islands 400 300 300 200 200 100 100 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 mates,suggestingthatforeignpositionsinU.S.agenciesmightberecoveringabitmore quicklythantheearlierestimatesindicate.Forcorporatebondsandequity,theSLTshows slightlyhigherpositionsthantheSurvey-Sestimates;inlargepart,thesehigherpositions areduetonewreporting,asshownintable1.Inaddition,unliketheSurvey-Sestimates, theSLTdatadonotincludeanadjustmentforoverreportingof securities,whichcanoccur if anissuerreportssecuritiesissueddirectlyintoforeignmarketsasfullyforeignheld,while U.S.custodianssimultaneouslyreportforeignholdingsof thosesecurities.25Asaresult,the SLTdataforexistingreporterswilltypicallyexceedamountsreportedintheliabilitiessurveys.Evenwiththisexpandedreportingcoverage,though,theSLTdatashowthatforeign holdingsof U.S.corporatedebtremainwellbelowtheirpre-crisislevels. Forspecificcountries,however,theSLTdatashowsomeunexpecteddevelopments(figure9).Forexample,TreasurybondsheldinBelgiumandLuxembourgontheSLTareconsiderablyhigherthantheSurvey-Sestimateswouldindicate(panelA).Thispatternhas appearedinpreviousyearsandislikelyduetotransactionsbias,wherethepurchasesare recordedthroughotherfinancialcenterssuchastheUnitedKingdom.Agencydebtholdingsalsoappeartobemovingup,contrarytoearlierpatterns(panelB).However,theconcentrationof theseholdings—especiallyof Treasurysecurities—insuchknowncustodial centersalsoservesasareminderthat,forU.S.securities,theSLTdataaresubjecttothe 25 Thisadjustmentcanonlybemadeatthesecuritylevelwiththeannualsurveys(theSLTiscollectedatthe aggregatelevel).Inrecentyears,thisadjustmenthasbeenaround$70billion.
18 FederalReserveBulletin|May2012 samecustodialbiasastheannualliabilitiessurvey,andthattheseincreasedholdingsinBelgiumandLuxembourgarenotnecessarilyonbehalf of residentsof thosecountries.Thus, thesemovementsmightpointtochangesincustodialortransactionsbehaviorbyinvestors outsideBelgiumandLuxembourg. SLTdataonTreasuryholdingsbytheUnitedKingdomareconsiderablylowerthanthe Survey-Sestimates;suchadiscrepancyistobeexpectedgiventransactionsbias(panelC). TheSLTdataindicatelowerU.K.holdingsinlate2011thanwasindicatedbythe June2011survey;thismovementcouldlikewiseindicatechangesincustodialpatterns. Finally,U.S.corporatebondholdingsbyresidentsof theCaymanIslandsasreportedon theSLTarewellaboveS-basedestimates(panelD).Althoughtheexpandedreporting paneloverallaccountsformuchof thehigherforeignholdingsof U.S.corporatebonds,in thisinstance,itiscontributingrelativelylittle—lessthan$10billion.Morethoroughreportingbyexistingreporterscontributesanothersignificantpiece—asmuchas$30billion—of theapproximately$80billionincrease.Amorecompleteexplanationforthisdifferencewill likelyonlybepossiblethroughcomparisonwiththedatafromthenextannualsurveyfor June2012. Holdings of Foreign Securities by U.S. Investors IncontrasttotheTICSLTdataonU.S.liabilitiestoforeignresidents,whicharebroadlyin linewithSurvey-Sestimates,theTICSLTdataforU.S.holdingsof foreignbondsand equityinSeptemberandDecemberweresignificantlyhigherthanSurvey-Sestimates. TheDecemberSLTdataforU.S.holdingsof foreignbonds(figure10,panelA)pointtoa fairlysharprun-upover2011,about$300billionabovetheSurvey-Sestimates—theverticaldistancebetweenthegreendotandtheblacklineandabout$400billionupfromthe endof 2010—theverticaldistancebetweenthelastblackdotandthelattergreendot. TheseincreasesareonlypartiallyexplainedbythenewreportersontheTICSLT.Asnoted intable1,newSLTreportersaccountedforonlyabout$80billionof U.S.holdingsof foreignbondsinDecember;about$10billioninadditionalreportingcamefromentitiesthat hadbeenreportingontheliabilitiessurveybutnotontheclaimssurvey.Asidefromthe newreporting,theremainingdifferenceof about$200billionislikelyduetosomecombinationof missingtransactionsontheTICS,incorrectlyestimatedvaluationchanges,and, possibly,incorrectreportingorvaluationontheSLT.WewillbelookingforfurtherclarificationfromtheDecember2011surveydata. Figure10.SurveyandSLTdataandSurvey-SestimatesofU.S.holdingsofforeignsecurities Billions of U.S. dollars Billions of U.S. dollars A. Foreign bonds B. Foreign stocks 6,000 Survey-S estimate 2,500 Survey SLT 5,000 2,000 4,000 1,500 3,000 1,000 2,000 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 19 U.S.holdingsof foreignequity(figure10,panelB)wereabout$4.7trillionattheendof 2010.UsingtheSurvey-Sestimationapproachdiscussedabove,theseholdingsdropped about$700billion,toaround$4trillion,bytheendof 2011.Of theestimated$700billion decline,cumulativevaluationlossestotaledabout$725billion,whichwaspartiallyoffsetby roughly$25billioninpurchases,asrecordedbytheTICS.TheDecember2011SLTmeasurementof about$4.5trillionisconsiderablyhigher,largelyduetoexpandedreporting. Asnotedintable1,newSLTreportersaccountedforatotalof about$300billioninnewly reportedholdingsof foreignequity.Of this$300billion,nearly$200billionwasintheCaymanIslands,reflectingtheeffortstoincorporatereportingfromhedgefunds,privateequity funds,andothermanagedfunds.Inadditiontotheincreaseinreportingfromnewreporters,aswithbonds,theSLTcollecteddatafromreporterswhohadbeenreportingonthe liabilitiessurveybutnottheclaimssurvey:thisgroupof reportersaccountedforatotalof about$130billioninU.S.holdingsof foreignequityontheDecember2011SLT. AssumingthattheSLTdataturnouttobeconsistentwiththeDecember2011claimssurveydata,thisfirstlookattheSLTsuggeststhatU.S.residents’holdingsof foreignbonds haveincreasedmorerapidlythanpreviousestimatessuggest.Asdidtheannualsurvey,the SLTconfirmedthatU.S.investors’holdingsof foreignbondsareconcentratedincorporate debtsecurities.Holdingsof governmentbondsaccountforroughly20percentof foreign bondholdings;thisproportionisaboutthesameasinthesurvey.Thus,theSLTdataindicatethatforeignbondholdings—mostlikelyholdingsof foreigncorporatebonds—now exceedtheir2007peakbyasubstantialmargin,perhapssuggestingthatU.S.investorsare increasinglyinterestedinoverseasinvestments.TheSLTdataalsosuggestthatU.S.residents’holdingsof foreignequity,whilewellbelowearlierpeaks,seemtohavedeclinedless thanearlierestimatesindicated. Fourth-Quarter Changes in Positions: SLT and Survey-S Estimates Asdiscussedabove,theSLTdataforSeptemberandDecembergenerallyindicatehigher cross-borderpositionsthantheSurvey-Sestimateswouldsuggest.Withthereleaseof the SeptemberandDecember2011SLTdata,itispossibletoexaminefourth-quarterchanges inholdingsfromtheSLTdatawithchangesfromtheSurvey-Sestimates.(Inprevious years,suchcomparisonswereonlypossiblewiththereleaseof surveydatanearlyayear afterthereportingdate.)ThedifferencesbetweentheSLTmovementsandthoseimpliedby theSurvey-Sestimatesresultfromseveralfactors:custodialandtransactionsbias,the effectsof applyingpriceindexvaluestoallholdingsof U.S.securitiesbyforeignersinconstructionof theSurvey-Sestimates,possiblemisreportingof themarketvalueof securities ontheTICSLT,andgapsthatarisefromcross-borderacquisitionsorsalesof securities thatarenotreportedontheTICS.Thesetransactionsmaynotbereportedbecausethey areconductedthroughintermediariesthatfalloutsideof theTICreportingsystemor becauseof missedreporting. Asseeninfigure11,largeportionsof theestimatedmovements,especiallyforequity,come fromestimatedvaluationchanges,themediumgreenbars.Preciselyestimatingvaluation changescanbechallenging.IntheSurvey-Sestimates,weassumethatvaluationchanges canbeapproximatedbystandardindexesof equitypricessuchastheMSCI.However, withmuchof thenewreportingcomingfromavarietyof managedfunds,itisdifficultto knowhowwellvaluationgainsorlossesonthesefundscanbeapproximatedbystandard broadequityindexes.Forexample,cross-borderholdingsof alltypesof funds—including fundsthatinvestinforeignbonds,U.S.Treasurysecurities,orcommodities,aswellas moneymarketfunds—areclassifiedas“equity”inthesurveysandtheSLT.Thus,thesecuritiesportfoliosof thesediversetypesof fundsmighthavepricemovementsthatdifferfrom thoseof standardindexes.Inthecomingyear,theincomingDecember2011claimssurvey andtheJune2012liabilitiessurveydatashouldallowustobetterassesstheactualreturns
20 FederalReserveBulletin|May2012 Figure11.SLTmeasurementsandSurvey-Sestimatesofchangesincross-borderlong-termsecurities holdings Billions of U.S. dollars Billions of U.S. dollars A. Foreign holdings of U.S. securities, by type B. Foreign holdings of U.S. securities, by holder Survey-S estimate 400 Survey-S estimate 400 SLT change SLT change Gap 300 Gap 300 S transactions S transactions Valuation change 200 Valuation change 200 100 100 + + 0_ 0_ 100 100 200 200 Treasury Agency Corporate Corporate Total bonds bonds bonds stocks Official Private Total Billions of U.S. dollars Billions of U.S. dollars C. Foreign holdings of Treasury bonds, selected countries D. Foreign holdings of U.S. equities, selected areas Survey-S estimate Survey-S estimate SLT change 150 SLT change 400 Gap Gap S transactions 100 S transactions Valuation change Valuation change 300 50 200 + 0_ 100 50 + 0_ 100 150 Caribbean 100 All China Switzerland Taiwan Cayman banking Middle Total All countries a c n o d u n IR tr O ie s s Norway Ireland Luxembourg All other E T u o r t o a p l e centers o E i a l s e t x e p r o n rters Asia All other and IROs Billions of U.S. dollars Billions of U.S. dollars E. U.S. holdings of foreign securities, by type F. U.S. holdings of foreign bonds, selected areas Survey-S estimate Survey-S estimate 80 SLT change 300 SLT change 60 Gap Gap S transactions S transactions 40 Valuation change 200 Valuation change 20 + 100 0_ 20 + 0_ 40 All countries Euro area 60 Total Bonds Stocks and IROs United Kingdom countries earnedoncross-borderinvestmentsoverthisperiodaswellastoassessthepotentialmagnitudeof missedtransactions.26 Althoughthereareonlytwoobservationstocompare,theSLTisalreadysignalingmovementsinsomeassetcategoriesthatsuggestdifferenttrendsincross-borderportfoliosthan theSurvey-Sestimates.Overall,asshownintherightmostsetof barsinfigure11,panelA, 26 Initialindicationsarethatreportingerrorsareminor.Thedatascreeningandevaluationprocessforthenew SLTdataincludedanalysisofeachreporter’sfilingsatthecountryandSLTitemlevelcomparedtotheanalogousdatafromthemostrecentsurvey.ThesedatareviewsindicatedthatvaluationsasreportedontheSLT weregenerallyconsistentwithreporters’surveyfilings,whichinturngenerallyprovidedaccuratevaluations.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 21 theSLTshowsanincreaseinforeignresidents’holdingsof U.S.securitiesof nearly $300billion,therightmostblackbar,inthefourthquarterof 2011,asmallerincreasethan thenearly$350billionincreaseindicatedbythechangeintheSurvey-Sestimates,therightmostdarkgreenbar.Thedifferencebetweenthesetwomeasures—theestimationgap (showninwhite)—however,isnotevenlydistributedacrosssecuritytypes,asindicatedby theothersetsof bars.TheTICSLTindicatedthatforeignholdingsof Treasurysecurities increasednearly$80billionbetweenSeptemberandDecember,theleftmostblackbar.This increaseissubstantiallylargerthansuggestedbytheSurvey-Sestimates:TICStransactions,theleftmostpalegreenbar,indicatedthatforeigninvestorspurchasedonnetroughly $50billioninTreasurysecuritiesoverthequarter.ButbecauseTreasurypricesdeclined roughly1percentovertheperiod,valuationchanges,theleftmostmediumgreenbar,are estimatedtohavereducedthemarketvalueof foreignholdingsabout$40billion,generatingacombinedSurvey-Sincreaseof onlyabout$10billion,theleftmostdarkgreenbar. WiththeSLTindicatingthatforeignholdingsof U.S.Treasurysecuritiesroseabout $80billion,thisdifferencesuggeststhatforeignnetpurchasescouldhavebeenlargerthan recordedintheTICS. TheSLTshowssmalldeclinesinforeignholdingsof U.S.agencybondsandcorporatedebt securities,broadlyconsistentwiththeSurvey-Sestimates.Incontrast,theSLTindicated thatforeigninvestors’holdingsof U.S.equityincreasedabout$280billion,thefourth blackbar,considerablylessthantheSurvey-Sestimateof $380billion,thefourthdark greenbar;wediscussthesedifferencesinmoredetailinthefollowingsection. TheSLTalsoindicatedadifferentbreakdownof suchchangesbytypeof holder(figure11, panelB):Foreignofficialpositionsincreasedmorethanearlierestimatesindicatedwhile privatepositionsincreasedbyless;asdiscussedabove,thesedifferencesarelikelydueto transactionsbiasthatdoesnotclassifypurchasesof U.S.securitiesasforeignofficialpurchasesif theyoccurthroughthird-partycountries. TheSLTdataalsoshowsomesurprisingchangesbycountryforforeignholdingsof Treasurysecurities(panelC).TheSLTshowedthatholdingsattributedtoChinadeclinedby moreinthefourthquarterof 2011—about$120billion—thansuggestedbytheSurvey-S estimates—about$60billion.Thelarger-than-estimateddeclineinholdingscouldindicate thatChineseofficialinvestorssoldmoreTreasurysecuritiesthanrecorded,orthatthey haveshiftedsomeof theirTreasuryholdingsandtransactionstocustodiansandfinancial intermediariesabroad.Suchshiftsarenotrecordedassalesbecausetheownershipof the securityisunchanged—onlythelocationof ownershipischanged.27Incontrast,Treasury holdingsforseveralcountries,includingNorway,Switzerland,Ireland,Taiwan,Luxembourg,andtheCaymanIslandsincreasedconsiderablymorethantheestimatesindicated. Foreign Holdings of U.S. Equity AsdisplayedinpanelDof figure11,thefourth-quarterchangeinforeignholdingsof U.S. equityasmeasuredbytheSLTwasabout$100billionlessthanthechangeimpliedbythe Survey-Sestimate,showingthatforeigninvestors’holdingsof U.S.equityincreasedabout $280billionratherthan$380billion.Thiscategoryof securitiesisheavilyaffectedbymeasuresof valuationchanges.Indeed,nearlyallof theSurvey-Sestimatedchangesaredueto valuationchanges,asshownbythemediumgreenbars.ThedifferencesbetweentheSLT andestimatedSurvey-SchangesweredominatedbygapsinEuropeandtheCaribbean, 27 SeeFAQA.5,“HowareTICdatausedbyBEAandtheFederalReserve?WhereelseareTICdatareportedor used?”ontheTreasury’swebpage,“FrequentlyAskedQuestionsRegardingtheTICSystemandTICData,” www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticfaq1.aspxattheTICwebsite,www.treasury- .gov/resource-center/faqs/Treasury-International-Capital/Pages/tic-faqs.aspx.
22 FederalReserveBulletin|May2012 regionsknowntobesubjecttosubstantialtransactionsbias.Inaddition,theseregionsare centersof incorporationformanyforeigninvestmentfunds,andasdiscussedabove,returns earnedonfundholdingsmaynotbewellapproximatedbythestandardequityprice indexesappliedintheestimatedSurvey-Schanges.Overall,theSLTindicateslowerforeign holdingsof U.S.equityinEuropeandtheCaribbean,butlarger-than-estimatedholdings byinvestorsintheMiddleEastandinAsia. SLT Data on Changes in U.S. Holdings of Foreign Securities TheSLTindicatesslightlysmallerincreasesintotalU.S.holdingsof foreignsecuritiesin thefinalquarterof 2011thanindicatedbytheSurvey-Sestimates(panelE)—about $170billionratherthanabout$150billion.28TheSurvey-SestimatesforequitywerereasonablyclosetothosefortheSLT,buttheestimatesforbondswerequitedifferent.The SLTindicatesthatU.S.holdingsof foreignbondsdeclinedbyabout$30billion(thefirst blackbar)—comparedwiththe$10billiondecreasesuggestedbytheSurvey-Sestimates (thefirstdarkgreenbar).WithinEurope,though,therearelargeandoffsettinggaps(panel F):TheSLTindicatesanincreaseinU.S.residents’holdingsof U.K.bonds(thesecond blackbar)whereastheSurvey-Sestimatepointstoadecrease(theseconddarkgreenbar). Incontrast,foreuroareacountries,whichsufferedfromseverefinancialstrainsduringthe latterhalf of 2011,theSLTindicatesadeclineinU.S.bondholdingsof over$40billion (thethirdblackbar),asharpcontrasttotheSurvey-S’sincreaseof about$10billion(the thirddarkgreenbar).ThesedifferenceslikelyreflectthetransactionsbiasintheSurvey-S estimates,withsalesof euroareabondsthatoccurredthroughU.K.intermediaries recordedas“U.K.sales”andmisinterpretedasdecreasesinholdingsof U.K.bonds.Inthis case,theSLTprovidesmuchdifferentinformationthanwouldhavebeenavailableotherwiseaboutanareaof ongoingconcern. Memo Items Asnotedinbox1,theSLTincorporatesreportingformemoitemsindicatingthetypeof issuerof U.S.corporatesecurities,thetypeof U.S.holderof foreignsecurities,andtwocategoriesof securities:ABSandfundshares.Thesegroupingswereselectedtoconformto BPM6guidelines.Feedbackfromrespondentsindicatedthatcategorizingthisinformation wasachallenge,butnonethelessreportinginthefirstfewmonthsof theSLTwasfairly completeandbroadlyconsistentwithanalogoussurveydata.Respondentswereabletocategorizeroughly95percentof bothclaimsandcorporateliabilities. U.S. Issuers of Long-Term Securities Held by Foreign Residents SLTreportingonthebreakdownof cross-borderholdingsof U.S.long-termsecuritiesby issuerforDecember2011indicatethatthelargestshare—about60percent—of U.S.longtermcorporatedebtandequityheldbyforeigninvestorswasissuedbynonfinancialfirms, withthenextsubstantialportion—justunder30percent—issuedbyfinancialfirmsother thandepositoryinstitutions,suchasmutualfunds,investmentbanks,issuersof corporate ABS,andinsurancecompanies.Of theremaining10percent,about8percentwasissuedby depositoryinstitutionsandtheresidualwasissuedbystateandlocalgovernments.These sharesareroughlyinlinewiththeindustryclassificationsderivedfromthe2010and2011 liabilitiessurveys.29 28 AlthoughtheSLTcollectsdataonU.S.holdingsofforeignbondsseparatelyforgovernmentandcorporate bonds,theTICScollectsdataonlyforbonds,andsocomparisonstoSurvey-Sestimatesmustbecalculatedat thehigherlevelofaggregation. 29 Seetable18inU.S.DepartmentoftheTreasury,FederalReserveBankofNewYork,andBoardofGovernors oftheFederalReserveSystem(2011).
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 23 Table2.ComparisonofSurveyandSLTdataoncross-borderholdingsofasset-backedsecurities Billionsofdollarsexceptasnoted U.S.governmentagencysecurities1 U.S.corporatebonds1 Foreigncorporatebonds2 Total Share Total Share Total Share SLT 730 70% 487 18% 266 16% Survey 712 69% 428 16% 193 11% 1 SurveydatafromJune2011liabilitiessurvey. 2 SurveydatafromDecember2010claimssurvey. U.S. Holders of Foreign Long-Term Securities TheSLTalsocollectsdataonU.S.holdersof foreignsecurities.Reportingcoveragewas reasonablygoodfortheseitemsaswell.Thisbreakdownshowsthat,fordebtaswellas equity,U.S.holderswerelargelyfinancialfirmsotherthandepositoryinstitutions,suchas investmentbanks,securitiesbroker–dealers,managedfunds,andinsurancecompanies. AlthoughtheTICclaimssurveycollectssomebroadcategoriesontypeof ownerforforeignsecurities,thereiscurrentlyonlylimitedoverlapinthesecategoriesandthosecollected ontheSLT,anditisthereforedifficulttomakecomparisonsbetweentheSLTandsurvey data. Fund Shares and ABS SLTandsurveydataonforeignholdingsof U.S.ABSandequityfundsharesarebroadly comparable(table2).Bothdatasourcesindicatethatforeignholdingsof U.S.government agencysecuritiesweredominatedbyABS(nearlyallmortgage-backedsecurities),which accountedforabout70percentof allcross-borderholdingsof agencydebtsecurities.Both datasourcesreportaconsiderablylowerABSshareforforeignholdingsof U.S.corporate bonds,around15to20percent. However,ontheclaimsside,U.S.holdingsof foreignsecurities,thesurveyandSLTfigures forcross-borderholdingsof ABSdifferbyasubstantialmargin.ThesurveyfigureforU.S. holdingsof foreigncorporateABSasashareof allsuchholdingsis11percentwhilethe correspondingSLTfigureis16percent.WhilethisdifferencecouldindicatethatU.S.acquisitionsof foreignABSpickedupmarkedlysinceDecember2010,itseemslikelythatat leastpartof thisdifferencemightbeduetochangesordifferencesinvaluationmethods adoptedbyreportersintheSLTcomparedwiththoseintheclaimssurveydata;asnotedin BertautandPounder(2009),valuationisespeciallychallengingforABS.Forsuchdifferences,thedetailedsurveydatawillbecritical.Weexpectthatcomparisonof the December2011SLTandclaimssurveydatawillrevealwhetherthisdifferencereflects movementsinABSholdingsordifficultieswithABSvaluation. SLTandsurveydataforU.S.holdingsof foreignequityfundsharesarelikewisefairlycomparable(table3)thoughcomparisonsaresomewhatmorechallenginginthiscategory becausereportingrequirementsareslightlydifferentforthesurveyandtheSLT.Both sourcesindicatethatcommonstock(asreportedonthesurvey)orallequityless fundshares(asreportedontheSLT)accountforabout80percentof cross-borderholdings of domesticequityandabout90percentof suchholdingsof foreignequity.
24 FederalReserveBulletin|May2012 Table3.ComparisonofSurveyandSLTdataoncross-borderholdingsofequityfundsharesand commonstock Billionsofdollarsexceptasnoted Domesticequity:Commonstock Foreignequity:Commonstock Total Share Total Share SLT 3,056 80% 3,965 89% Survey 3,070 79% 4,327 93% Note:SLTcommonstocktotalsestimatedastotalequitylessfundshares. Conclusion ThenewTICSLTisdesignedtoprovidereadingsoncross-borderpositionsinlong-term securitiesthataremuchtimelierthantheexistingannualsurveysandmoreaccurate thanestimatesbasedontheTICStransactions.Movementsinownershipof thesesecuritiesareanimportantbarometerof cross-borderinvestorsentiment;intimesof financial strainandcrisis,moretimelyandaccuratemeasurementsof cross-borderfinancialmovementscanindicatewherestrainsmightbemoreorlessacute,andcanpointtonear-term andlonger-termprospectsforassetpricesandforthefinancingof currentaccount imbalances. TheSLTdataaresubjecttothesamecustodialbiaspresentintheliabilitiessurveys,which meansthattheSLTalsocannotfullyattributeforeignholdingsof U.S.securitiesbycountryof ultimateinvestor.Moreover,despiteongoingeffortstoreconcileholdingsreported ontheSLTwithdatareportedontheannualsurveysandthroughtheTICS,somedegree of reportingerrorlikelyremains.Weanticipatethatfulleranalysisandcomparisonswith annualsurveydatafrommonthswhentheSLTwasalsobeingcompiled(December2011 forclaimsandJune2012forliabilities)willallowformore-expansiveanalysisof SLTdata qualityandtrends. TheinitialTICSLTdataforSeptemberandDecember2011aregenerallyconsistentwith themorecomprehensivemeasuresof securitiesholdingscollectedintheannualsurveysand withtheintermediateestimates,whicharebasedonsubsequenttransactionsandadjustmentsforvaluationchangesinsecuritiesholdings,providingconsiderablecomfortthatthis newdatainitiativewillbeabletoprovidereliablemeasuresof U.S.cross-bordersecurities positionsonatimelybasis.Nonetheless,thefirsttwodatacollectionsforSeptemberand December2011revealsomeimportantdevelopments.First,theSLTdata,partiallydueto expandedreporting,areshowingsomewhathigherforeignholdingsof U.S.securitiesand U.S.holdingsof foreignsecuritiesthanexpected,basedonthemostrecentsurveysand intermediatetransactions-basedestimates.Forthefinalquarterof 2011,thefirstperiodfor whichatime-seriescomparisonispossible,theSLTdatapointtosmallerchangesinholdingsinbothforeignholdingsof U.S.securitiesandU.S.holdingsof foreignsecuritiesthan theSurvey-Sestimates.Morespecifically,contrarytoearlierestimatesbasedonTICSand surveydatawhichindicatedthatU.S.investorsslightlyincreasedtheirholdingsof euro areabonds,theSLTindicatesthereverse:U.S.investorsreducedtheirholdingsof these assetsbyabout10percentduringthisdifficulttimeforEuropeanfinancialmarkets.The SLTalsopointstostrongerforeigndemandforU.S.Treasurysecuritiesoverallbuta steeperdeclineinChina’sholdingsof Treasurysecuritiesthanhadbeenestimatedearlier. Goingforward,theSLTwillallowformuchmoretimelyandaccuratetrackingof these andotherdevelopments—uptoayearearlierthanhadbeenpossible—and,ascircumstanceswarrant,correspondinglymoretimelypolicyresponses.
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 25 Appendix A: The TIC Reporting System UnderthecurrentTreasuryInternationalCapital(TIC)reportingsystem,anassortmentof monthlyandquarterlyreportsarefiledwithdistrictFederalReserveBanksbycommercial banks,securitiesdealers,otherfinancialinstitutions,andnonbankingenterprisesinthe UnitedStates(tableA.1).ThesedataarecentrallyprocessedandmaintainedattheFederal TableA.1.SummaryofTICreportingforms Magnitude** Position Valuation (BillionsofU.S.dollars TICform Item Frequency Reportertype orflow method asoflastreportingdate in2011) BC:ReportofU.S.Dollar Position Depositaccounts,loans, Face Monthly U.S.-resident $3,177 ClaimsonForeigners short-termsecurities,and entities otherclaims BL-1:ReportofU.S.Dollar Position Deposits,short-term Face Monthly U.S.-resident $3,628 LiabilitiestoForeignResidents securities,andotherown entities liabilities BL-2:ReportofCustomers’ Position Short-termsecuritiesand Face Monthly U.S.-resident $1,022 U.S.DollarLiabilitiesto othercustodyliabilities entities Foreigners BQ-1:ReportofCustomers’ Position Depositaccounts,short-term Face Quarterly U.S.-resident $676 U.S.DollarClaimson securities,andothercustody entities Foreigners claims BQ-2: Position Deposits,short-term Face Quarterly U.S.-resident $655 Part1–ReportofForeign securities,andother entities CurrencyLiabilitiesandClaims liabilitiesinforeigncurrency onForeigners Part2–ReportofCustomers’ ForeignCurrencyLiabilitiesto Foreigners BQ-3:ReportofMaturitiesof Position Deposits,short-term Face Quarterly U.S.-resident Notpublished* SelectedLiabilitiesto securities,andother entities Foreigners liabilities CQ-1:ReportofFinancial Position Deposits,short-term Face Quarterly U.S.-resident $61 Liabilitiesto,andFinancial securities,andother entities Claimson,Unaffiliated liabilitiesandclaims Foreign-Residents CQ-2:ReportofCommercial Position Tradepayables,advance Face Quarterly U.S.-resident $118 Liabilitiesto,andCommercial receipts,andotherliabilities; entities Claimson,Unaffiliated tradereceivables,advance Foreign-Residents payments,andotherclaims D:ReportofHoldingsof,and Position Derivativescontracts Fairvalue Quarterly U.S.-resident Grosspos.FV:$4,705 Transactionsin,Financial andnet entitieswith Grossneg.FV:$4,578 DerivativesContracts flows derivatives Netsettlements:$33 contracts S:PurchasesandSalesof Flow Long-termsecurities Market Monthly Brokersand U.S.securities: Long-TermSecuritiesby dealers, ‰ For.purch.:$1,650 Foreign-Residents security ‰ For.sales:$1,669 underwriters, ‰ For.officialpurch:$101 issuersof ‰ For.officialsales:$111 securities,end investors F ‰ or U e . ig S n .p s u e r c c u h r . i : ti $ e 5 s 0 : 5 ‰ U.S.sales:$543 SHCA:ReportofU.S. Position Long-andshort-term Market Annual: Large $6,763 OwnershipofForeign securities December custodial Securities,IncludingSelected banks,security MoneyMarketInstruments broker–dealers, endinvestors SHLA:Foreign-Residents’ Position Long-andshort-term Market Annual: Large $12,440 HoldingsofU.S.Securities, securities June custodial IncludingSelectedMoney banks,issuers, MarketInstruments security broker–dealers SLT:AggregateHoldingsof Position Long-termsecurities Market Monthly Large U.S.liabilities:$11,910 Long-TermSecuritiesbyU.S. custodial Foreignclaims:$6,575 andForeignResidents banks,issuers, endinvestors, managed funds Note:U.S.-residententitiesincludedepositoryinstitutions,bankholdingcompanies,financialholdingcompanies,andsecuritiesbroker–dealers. **Totalsasofend-December2011. *TheBQ-3dataincludematuritybreakdownsusedforsupplementalcalculations.
26 FederalReserveBulletin|May2012 ReserveBankof NewYork,which,alongwiththedistrictbanks,actsasfiscalagentforthe U.S.Treasury.Sincelate1998,theFederalReserveBoardalsohassupportedtheTICdata collectionsystembyprovidingfinalreviewanddisseminationof TICdatatotheTreasury aswellastootheragencies,includingtheBureauof EconomicAnalysisandtheBankfor InternationalSettlements.TheTICreportsof individualrespondentsaretreatedasconfidentialandaccesstotherespondent-leveldataisstrictlylimitedtospecificstaff of the TreasuryandtheFederalReserveSystem. DataderivedfromTreasuryreportsarepostedmonthlyontheTICwebsite, www.ustreas.gov/tic.TICdataaggregatesarealsopublishedmonthlyattheFederal Reserve’swebsite,www.federalreserve.gov/econresdata/releases/secholdtrans/current.htm, andareusedintheU.S.internationaltransactionsandinvestmentpositioncompilations publishedbytheDepartmentof CommerceintheSurveyof CurrentBusiness. Report Forms TICBC(forU.S.claims)collectsdataonU.S.-residentbanks’claimsonforeigners,includingdepositaccounts,loans,andforeignshort-termsecuritiesheldbyU.S.residentsas reportedbybanks,otherdepositoryinstitutions,andsecuritiesbrokersanddealersinthe UnitedStates.Bankholdingcompanies(BHCs)andfinancialholdingcompanies(FHCs) alsoreportfortheirdomesticnonbankandnonsecuritiesfirmaffiliates,otherthantheir insuranceaffiliates,whoreportseparatelyontheC-seriesforms.Dataonrespondents’own dollarclaimsarecollectedmonthlyonFormBC.Dataonclaimsheldfordomesticcustomersaswellasonclaimsdenominatedinforeigncurrenciesiscollectedonaquarterlybasis onlyonformsBQ-1andBQ-2,respectively. TICBLforms(forU.S.liabilities)coverU.S.-residentbanks’liabilitiestoforeigners,includingdeposits,U.S.short-termsecuritiesheldbyforeigners,andotherliabilitiesasreported bybanks,otherdepositoryinstitutions,andsecuritiesbrokersanddealersintheUnited States.BHCsandFHCsalsoreportforalldomesticnonbank,nonsecuritiesfirmaffiliates, otherthantheirinsuranceaffiliates,whoreportseparatelyontheC-seriesforms.Banks’ owndollar-denominatedliabilitiesarereportedmonthlyonformBL-1,andcustomers’ dollar-denominatedliabilitiesarereportedmonthlyonformBL-2.Liabilitiesdenominated inforeigncurrenciesarereportedquarterlyonformBQ-2. TICCQformscollectquarterlydataontheliabilitiesto,andclaimson,unaffiliatedforeignersof exporters,importers,industrialandcommercialconcerns,financialinstitutions (otherthanbanks,otherdepositoryinstitutions,andsecuritiesbrokersanddealers),and othernonbankingenterprisesintheUnitedStates.Financialclaimsandliabilities,suchas depositsandshort-termsecurities,arereportedontheCQ-1.Commercialclaimsand liabilities,suchastradereceivablesandpayables,arereportedontheCQ2.Dataexclude claimsonforeignersheldincustodybybanksintheUnitedStates. TICDcollectsquarterlydataonholdingsandnetcashsettlementsof cross-borderderivativescontractsreportedbybanks,securitiesbrokers,dealers,andnonfinancialcompanies intheUnitedStateswithsizableholdingsof derivativescontracts.Totalholdingsare dividedbetweenthosecontractswithpositivefairvaluesandthosecontractswithnegative fairvaluesfromtheperspectiveof thereporter.Thefair(market)valueisgenerallydefined astheamountforwhichaderivativecontractcouldbeexchangedinacurrenttransaction betweenwillingparties,otherthaninaforcedorliquidationsale. TICScollectsmonthlydataongrosspurchasesandgrosssalesbetweenU.S.residentsand foreignresidentsinlong-termdomesticandforeignsecuritiesasreportedbybanks,securitiesbrokersanddealers,andotherfinancialintermediariesintheUnitedStates.Amemo-
ImprovingtheMeasurementof Cross-BorderSecuritiesHoldings 27 randumsectionreportsthetransactionsinU.S.securitiesthatrepresentpurchasesorsales byforeignofficialinstitutions. TICSHCAandSHCformscollecttheannualandbenchmarkTICsurveydataonU.S. holdingsof foreignlong-andshort-termsecuritiesattheindividualsecuritylevel. TICSHLAandSHLformscollecttheannualandbenchmarkTICsurveydataonforeign residents’holdingsof U.S.long-andshort-termsecuritiesattheindividualsecuritylevel. TICSLTcollectsmonthlydataattheaggregatelevelonforeignholdingsof U.S.long-term securitiesandonU.S.holdingsof foreignlong-termsecuritiesbybroadsecuritytype.
28 FederalReserveBulletin|May2012 References Beltran,DanielO.,LauriePounder,andCharlesThomas(2008).“ForeignExposureto Asset-BackedSecuritiesof U.S.Origin,”InternationalFinanceDiscussionPapers939. Washington:Boardof Governorsof theFederalReserveSystem,August, www.federalreserve.gov/pubs/ifdp/2008/939/default.htm. Bertaut,CarolC.,andLauriePounder(2009).“TheFinancialCrisisandU.S.Cross- BorderFinancialFlows,”FederalReserveBulletin,vol.95,pp.A147–67, www.federalreserve.gov/pubs/bulletin/2009/articles/crossborder/default.htm. Bertaut,CarolC.,andRalphW.Tryon(2007).“MonthlyEstimatesof U.S.Cross-Border SecuritiesPositions,”InternationalFinanceDiscussionPapers910.Washington:Board of Governorsof theFederalReserveSystem,November,www.federalreserve.gov/pubs/ ifdp/2007/910/default.htm. Bertaut,CarolC.,WilliamL.Griever,andRalphW.Tryon(2006).“UnderstandingU.S. Cross-BorderSecuritiesData,”FederalReserveBulletin,vol.92,pp.A59–75, www.federalreserve.gov/pubs/bulletin/2006/crossbordersecurities/default.htm. Griever,WilliamL.,GaryA.Lee,andFrancisE.Warnock(2001).“TheU.S.Systemfor MeasuringCross-BorderInvestmentinSecurities:APrimerwithaDiscussionof Recent Developments,”FederalReserveBulletin,vol.87,pp.633–50,www.federalreserve.gov/ pubs/bulletin/2001/1001lead.pdf. InternationalMonetaryFund(2011).“IMFExecutiveBoardDiscussesMonitoringFinancialInterconnectedness,IncludingtheDataTemplateforGlobalSystemicallyImportant FinancialInstitutions,”publicinformationnoticeno.11/61,May25,www.imf.org/ external/np/sec/pn/2011/pn1161.htm. InternationalMonetaryFundandFinancialStabilityBoardSecretariat(2010).“The FinancialCrisisandInformationGaps:ProgressReportActionPlansandTimetables,” report.Washington:IMF,May,www.imf.org/external/np/g20/pdf/053110.pdf. ----(2009).“TheFinancialCrisisandInformationGaps:ReporttotheG–20FinanceMinistersandCentralBankGovernors,”report.Washington:IMF,October,www.imf.org/ external/np/g20/pdf/102909.pdf. U.S.Departmentof theTreasury,FederalReserveBankof NewYork,andBoardof Governorsof theFederalReserveSystem(2011).“ReportonForeignPortfolioHoldingsof U.S.Securitiesasof June30,2011,”report.Washington:Departmentof theTreasury, June,www.treasury.gov/resource-center/data-chart-center/tic/Documents/shla2011r.pdf. ----(2010).“ReportonU.S.PortfolioHoldingsof ForeignSecuritiesasof December31, 2010,”report.Washington:Departmentof theTreasury,December,www.treasury.gov/ resource-center/data-chart-center/tic/Documents/shc2010r.pdf. Warnock,FrancisE.andChadCleaver(2002).“FinancialCentersandtheGeographyof CapitalFlows,”InternationalFinanceDiscussionPapers722.Washington:Boardof Governorsof theFederalReserveSystem,April,www.federalreserve.gov/pubs/IFDP/ 2002/722/ifdp722.pdf.
29 Federal Reserve BULLETIN June 2012 Vol 98, No 2 Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances JesseBricker,ArthurB.Kennickell,KevinB.Moore,andJohnSabelhaus,of theBoard'sDivisionof ResearchandStatistics,preparedthisarticlewithassistancefromSamuelAckerman, RobertArgento,GerhardFries,andRichardA.Windle. TheFederalReserveBoard’sSurveyof ConsumerFinances(SCF)for2010provides insightsintochangesinfamilyincomeandnetworthsincethe2007survey.1Thesurvey showsthat,overthe2007–10period,themedianvalueof real(inflation-adjusted)family incomebeforetaxesfell7.7percent;medianincomehadalsofallenslightlyinthepreceding three-yearperiod(figure1).Thedeclineinmedianincomewaswidespreadacrossdemographicgroups,withonlyafewgroupsexperiencingstableorrisingincomes.Mostnoticeably,medianincomesmovedhigherforretireesandothernonworkingfamilies.Thedecline inmedianincomewasmostpronouncedamongmorehighlyeducatedfamilies,families headedbypersonsagedlessthan55,andfamilieslivingintheSouthandWestregions. Realmeanincomefellevenmorethanmedianincomeintherecentperiod,by11.1percent acrossallfamilies.Thedeclineinmeanincomewasevenmorewidespreadthanthedecline inmedianincome,withvirtuallyalldemographicgroupsexperiencingadeclinebetween 2007and2010;thedeclineinthemeanwasmostpronouncedinthetop10percentof the incomedistributionandforhighereducationorwealthgroups.Overtheprecedingthree years,meanincomehadrisen,especiallyforhigh-net-worthfamiliesandfamiliesheadedby apersonwhowasself-employed. Thedecreasesinfamilyincomeoverthe2007−10periodweresubstantiallysmallerthanthe declinesinbothmedianandmeannetworth;overall,mediannetworthfell38.8percent, andthemeanfell14.7percent(figure2).Mediannetworthfellformostgroupsbetween 2007and2010,andthedeclineinthemedianwasalmostalwayslargerthanthedeclinein themean.Theexceptionstothispatterninthemediansandmeansareseeninthehighest10percentof thedistributionsof incomeandnetworth,wherechangesinthemedian wererelativelymuted.Althoughdeclinesinthevaluesof financialassetsorbusinesswere importantfactorsforsomefamilies,thedecreasesinmediannetworthappeartohavebeen drivenmoststronglybyabroadcollapseinhouseprices.2Thiscollapseisreflectedinthe patternsof changeinnetworthacrossdemographicgroupstovaryingdegrees,depending 1 Foradetaileddiscussionofthe2004and2007surveysaswellasreferencestoearliersurveys,seeBrianK.Bucks, ArthurB.Kennickell,TraciL.Mach,andKevinB.Moore(2009),“ChangesinU.S.FamilyFinancesfrom2004to 2007:EvidencefromtheSurveyofConsumerFinances,”FederalReserveBulletin,vol.95,pp.A1–A55, www.federalreserve.gov/pubs/bulletin/default.htm.Informationaboutchangesinfamilyfinancesbetween2007and 2009basedonare-interviewof2007SCFfamiliescanbefoundinJesseBricker,BrianBucks,ArthurKennickell, TraciMach,andKevinMoore(2011),“SurveyingtheAftermathoftheStorm:ChangesinFamilyFinancesfrom 2007to2009,”FinanceandEconomicsDiscussionSeries2011-17(Washington:BoardofGovernorsoftheFederal ReserveSystem,March),www.federalreserve.gov/pubs/feds/2011/201117/index.html 2 Ifprimaryresidencesandtheassociatedmortgagedebtareexcluded,themedianoffamilies’networthisreduced from$126,400to$42,300in2007andfrom$77,300to$29,800in2010.Althoughtheadjustedwealthmeasure declinedproportionatelybyonlyasomewhatsmalleramountthantheunadjustedmeasure—29.7percent—the
30 FederalReserveBulletin|June2012 ontherateof homeownershipand Figure1.Changeinmedianandmeanincomes, theproportionof assetsinvestedin 2001–10SCF housing.Thedeclineinmediannet worthwasespeciallylargeforfami- 10.0 Median liesingroupswherehousingwasa Mean largershareof assets,suchasfami- 5.0 liesheadedbysomeone35to 44yearsold(mediannetworthfell .0 54.4percent)andfamiliesinthe Westregion(mediannetworthfell –5.0 55.3percent). Asubstantialpartof thedeclines –10.0 observedinnetworthoverthe 2007–10periodcanbeassociated –15.0 withdecreasesinthelevelof unre- 2001–04 2004–07 2007–10 alizedcapitalgainsonfamilies’ assets.Theshareof totalassetsof Note:Changesarebasedoninflation-adjusteddollars. Source:FederalReserveBoard,SurveyofConsumerFinances. allfamiliesattributabletounrealizedcapitalgainsfromrealestate, businesses,stocks,ormutualfunds fell11.6percentagepoints,to24.5percentin2010.Althoughtheoveralllevelof debtowed byfamilieswasbasicallyunchanged,debtasapercentageof assetsrosebecausethevalue of theunderlyingassets(especiallyhousing)decreasedfaster. Withoverallmedianandmeandebtbasicallyunchangedorfallinglessthanincome,measuresof debtpaymentsrelativetoincomemighthavebeenexpectedtoincrease.Infact, totalpaymentsrelativetototalincomeincreasedonlyslightly,andthemedianof payments relativetoincomeamongfamilies withdebtfellafterhavingrisen Figure2.Changeinmedianandmeannetworth, between2004and2007.Theshare 2001–10SCF of familieswithhighpayments relativetotheirincomesalsofell 30.0 afterrisingsubstantiallybetween Median 2001and2007. 20.0 Mean 10.0 Thisarticlereviewstheseandother .0 changesinthefinancialcondition of U.S.familiesbetween2007and –10.0 2010.3Thediscussiondrawson –20.0 datafromtheFederalReserve –30.0 Board’sSCFforthoseyears;italso usesevidencefromotheryearsof –40.0 thesurveyandaspecialpanelSCF –50.0 conductedfrom2007to2009to 2001–04 2004–07 2007–10 placethe2007–10changesina Note:Changesarebasedoninflation-adjusteddollars. broadercontext. Source:FederalReserveBoard,SurveyofConsumerFinances. amountofthechangeis,obviously,muchsmaller;medianadjustedwealthdeclined$12,600,whiletheunadjustedmeasurefell$49,100. 3 Seebox1,“TheDataUsedinThisArticle,”forageneraldescriptionofthedata.Theappendixtothisarticle providesasummaryofkeytechnicalaspectsofthesurvey.SeealsoBucks,Kennickell,Mach,andMoore, “ChangesinU.S.FamilyFinancesfrom2004to2007,”andBricker,Bucks,Kennickell,Mach,andMoore, “SurveyingtheAftermathoftheStorm.”
ChangesinU.S.FamilyFinancesfrom2007to2010 31 Box 1. The Data Used in This Article DatafromtheSurveyofConsumerFinances(SCF)arethebasisoftheanalysispresented inthisarticle.TheSCFisnormallyatriennialinterviewsurveyofU.S.familiessponsoredby theBoardofGovernorsoftheFederalReserveSystemwiththecooperationoftheU.S. DepartmentoftheTreasury.Since1992,datafortheSCFhavebeencollectedbyNORC,a researchorganizationattheUniversityofChicago,roughlybetweenMayandDecemberof eachsurveyyear. Themajorityofstatisticsincludedinthisarticlearerelatedtocharacteristicsof“families.” Asusedhere,thistermismorecomparablewiththeU.S.CensusBureaudefinitionof “households”thanwithitsuseof“families,”whichexcludesthepossibilityofone-person families.Theappendixprovidesfulldefinitionsof“family”fortheSCFandtheassociated family“head.”Thesurveycollectsinformationonfamilies’totalincomebeforetaxesforthe calendaryearprecedingthesurvey.Butthebulkofthedatacoverthestatusoffamiliesas ofthetimeoftheinterview,includingdetailedinformationontheirbalancesheetsanduse offinancialservicesaswellasontheirpensions,laborforceparticipation,anddemographiccharacteristics.Exceptinasmallnumberofinstances(seetheappendixandthe textfordetails),thesurveyquestionnairehaschangedinonlyminorwaysrelevanttothis articlesince1989,andeveryefforthasbeenmadetoensurethemaximumdegreeofcomparabilityofthedataovertime. Theneedtomeasurefinancialcharacteristicsimposesspecialrequirementsonthesample designforthesurvey.TheSCFisexpectedtoprovidereliableinformationbothonattributesthatarebroadlydistributedinthepopulation(suchashomeownership)andonthose thatarehighlyconcentratedinarelativelysmallpartofthepopulation(suchascloselyheld businesses).Toaddressthisrequirement,theSCFemploysasampledesign,essentially unchangedsince1989,consistingoftwoparts:astandard,geographicallybasedrandom sampleandaspecialoversampleofrelativelywealthyfamilies.Weightsareusedtocombineinformationfromthetwosamplestomakeestimatesforthefullpopulation.Inthe 2010survey,6,492familieswereinterviewed,andinthe2007survey,4,421were interviewed. Thisarticledrawsprincipallyuponthefinaldatafromthe2010and2007surveys.Toprovidealargercontext,someinformationisalsoincludedfromthefinalversionsofearlier surveys,aswellasapanelinterviewin2009withrespondentstothe2007survey.1Differencesbetweenestimatesfromearliersurveysasreportedhereandasreportedinearlier FederalReserveBulletinarticlesareattributabletoadditionalstatisticalprocessing,correctionofminordataerrors,revisionstothesurveyweights,conceptualchangesinthedefinitionsofvariablesusedinthearticles,andadjustmentsforinflation.Inthisarticle,alldollar amountsfromtheSCFareadjustedto2010dollarsusingthe“currentmethods”versionof theconsumerpriceindexforallurbanconsumers(CPI-U-RS).Theappendixprovides additionaldetailontheadjustments. Theprincipaldetailedtablesdescribingassetanddebtholdingsfocusonthepercentage ofvariousgroupsthathavesuchitemsandthemedianholdingforthosewhohavethem.2 Thisconditionalmedianischosentogiveasenseofthe“typical”holding.Generally,when onedealswithdatathatexhibitverylargevaluesforarelativelysmallpartofthepopulation—asisthecaseformanyoftheitemsconsideredinthisarticle—estimatesofthe medianareoftenstatisticallylesssensitivetosuchoutliersthanareestimatesofthemean. Oneliabilityofusingthemedianasadescriptivedeviceisthatmediansarenotadditive; thatis,thesumofthemediansoftwoitemsforthesamepopulationisnotgenerallyequal tothemedianofthesum(forexample,medianassetslessmedianliabilitiesdoesnotequal mediannetworth).Incontrast,meansforacommonpopulationareadditive.Wherea comparablemedianandmeanaregiven,thegainorlossofthemeanrelativetothe medianmayusuallybetakenasindicativeoftherelativechangeatthetopofthedistribution;forexample,whenthemeandecreasesmorerapidlythanthemedian,itistypically takentoindicatethatthevaluesinthetopofthedistributionfellmorethanthoseinthe lowerpartofthedistribution. continuedonnextpage
32 FederalReserveBulletin|June2012 Box 1—continued Toprovideameasureofthesignificanceofthedevelopmentsdiscussedinthisarticle, standarderrorsduetosamplingandimputationformissingdataaregivenforselected estimates.Spacelimitspreventtheinclusionofthestandarderrorsforallestimates. Althoughwedonotdirectlyaddressthestatisticalsignificanceoftheresults,thearticle highlightsfindingsthataresignificantorareinterestinginabroadercontext. 1 Additionalinformationaboutthesurveyisavailableatwww.federalreserve.gov/econresdata/scf/scf_2010.htm. 2 Themedianofadistributionisdefinedasthevalueatwhichequalpartsofthepopulationconsideredhavevalues largerorsmaller. Economic Background Families’financesareaffectedbyboththeirowndecisionsandthestateof thebroader economy.Overthe2007–10period,theU.S.economyexperienceditsmostsubstantial downturnsincetheGreatDepression.Realgrossdomesticproduct(GDP)fellnearly 5.1percentbetweenthethirdquarterof 2007andthesecondquarterof 2009,theofficial periodof recessionasdeterminedbytheNationalBureauof EconomicResearch.During thesameperiod,theunemploymentraterosefrom5.0percentto9.5percent,thehighest levelsince1983.Recoveryfromtheso-calledGreatRecessionhasalsobeenparticularly slow;realGDPdidnotreturntopre-recessionlevelsuntilthethirdquarterof 2011.The unemploymentratecontinuedtorisethroughthethirdquarterof 2009andremainedover 9.4percentduring2010.Therateof inflation,asmeasuredbytheconsumerpriceindexfor allurbanconsumers(CPI-U-RS),decreasedsomewhatovertheperiodfromanannual averageof 2.8percentin2007to1.6percentin2010. Financialmarketsmoveddramaticallyoverthethree-yearperiod.Majorstockmarket indexesfellnearly50percentbetweenSeptember2007andMarch2009,butaboutone-half of thelossesinindexessuchastheDowJonesindustrialaverage,theStandard&Poor’s 500,andtheWilshire5000hadbeenrecoupedbySeptember2010.Interestratesonnew consumerloansgenerallyfell;forexample,theinterestrateonanew30-yearfixed-rate mortgageaveraged6.38percentinSeptember2007,whenaboutone-half of theinterviews forthe2007surveyhadbeencompleted,andtheaverageratewas4.35percentthreeyears laterinSeptember2010.Yieldsfelldramaticallyonliquiddeposits,timedeposits,and bonds;forexample,therateonathree-monthcertificateof deposit(CD)fellfromanaverageof 5.46percentinSeptember2007to0.28percentinSeptember2010. Housingwasof greaterimportancethanfinancialassetsforthewealthpositionof most families.Thenationalpurchase-onlyLoanPerformanceHomePriceIndexproducedby FirstAmericanCoreLogicfell22.4percentbetweenSeptember2007andSeptember2010, bywhichpointhousepriceswerefully27.5percentbelowthepeakachievedinApril2006. Thedeclineinhousepriceswasmostrapidinthestateswheretheboomhadbeengreatest. Forexample,California,Nevada,Arizona,andFloridasawdeclinesof 40to50percent, whileIowasawadeclineof onlyabout1percent.Homeownershipratesfelloverthe period,inpartbecausesomefamiliesfounditimpossibletocontinuetoaffordtheirhomes. By2010,thehomeownershipratewasbackdowntoalevellastseeninthe2001SCF, althoughthatwasstillhigherthaninanypreviousSCFsinceatleast1989. TheCongressandthePresidentrespondedtotheeconomicsituationwithseverallegislative measures,someof whichhadanimmediateeffectonfamilyfinances,andsomeof which wereintendedtohelppreventfuturecrises.Forexample,inordertoboostfamilyafter-tax incomes,the2001and2003incometaxreductionsoriginallyscheduledtoexpirein2010 wereextended.Inaddition,employeepayrolltaxesearmarkedforSocialSecuritywere reduced.Inanothermoveaimedatoffsettingthedeclineineconomicactivity,theTroubled
ChangesinU.S.FamilyFinancesfrom2007to2010 33 AssetRelief Programallowedgovernmentinfusionof equityintostressedfinancialinstitutions.Lawmakersalsorespondedtotheeconomiccrisisbyattemptingtocurtailpractices thatdisproportionatelyaffectedvulnerableconsumers,practicesthatsomearguedhadcontributedtothecrisis.Mostnotably,theDodd–FrankWallStreetReformandConsumer ProtectionAct,passedinJuly2010,containedprohibitionsoncertainlendingpractices andcreatedtheConsumerFinancialProtectionBureau. Severaldemographicshiftshadimportantconsequencesforthestructureof thepopulation.Theagingof thebaby-boompopulationfrom2007to2010drovean11.0percent increaseinthepopulationaged55to64.Overallpopulationgrowthwasabout2.7percent, and,accordingtofiguresfromtheU.S.CensusBureau,21.5percentof thatgrowthwas duetonetimmigration.AlsoaccordingtoCensusBureauestimates,thenumberof householdsincreased1.2percent—belowthe2.3percentrateof householdformationbetween 2004and2007.Withthepopulationgrowingmorerapidlythanhouseholdformation,the averagenumberofpersonsperhouseholdroseslightlyfrom2.59peoplein2007to2.63in2010. Thevastmajorityof interviewsforthe2010SCFwerecompletedin2010,butsomewere completedinearly2011.Thus,thesurveydataarelargelyunaffectedbychangesineconomicactivitysince2011—inparticular,theriseinthemarketpriceof corporateequities, therelativestabilizationof houseprices,andthestartof adeclineintheunemploymentrate. Income Thechangeinrealbefore-taxfamilyincomebetween2007and2010divergedsharplyfrom thepatternsseeninrecentsurveys.4Bothmedianandmeanincomefellsharply,thoughthe dropinthemedian(7.7percent)wassmallerthanthedropinthemean(11.1percent) (table1).5Overtheprecedingthree-yearperiod,themedianhadbeenbasicallyunchanged, andthemeanhadrisen8.5percent.Thechangesforbothperiodsstandinstarkcontrastto apatternof substantialincreasesinboththemedianandthemeandatingtotheearly 1990s. Underlyingtherecentchangewasashiftinthecompositionof incomebetween2007and 2010(table2).Theshareof familyincomeattributabletorealizedcapitalgainsfellfrom 6.7percentin2007toonly0.9percentin2010;incomefrombusinesses,farms,andselfemploymentaccountedforonly12.2percentof incomein2010,downfrom13.6percentin 2007.Offsettingthesedeclinesinshares,theshareof incomefromwagesandsalariesrose 3.6percentagepoints;thatof SocialSecurity,pension,orotherretirementincomerose 4 Tomeasureincome,theinterviewersrequestinformationonthefamily’scashincome,beforetaxes,forthefull calendaryearprecedingthesurvey.ThecomponentsofincomeintheSCFarewages;self-employmentand businessincome;taxableandtax-exemptinterest;dividends;realizedcapitalgains;foodstampsandother, relatedsupportprogramsprovidedbygovernment;pensionsandwithdrawalsfromretirementaccounts;Social Security;alimonyandothersupportpayments;andmiscellaneoussourcesofincomeforallmembersofthe primaryeconomicunitinthehousehold. 5 Overthe2007–10period,estimatesofinflation-adjustedhouseholdincomeforthepreviousyearfromtheCurrentPopulationSurvey(CPS)oftheCensusBureaushowadecreaseinboththemedian(negative2.2percent) andthemean(negative3.6percent);bothofthesechangesaresmallerinabsolutetermsthanthecorrespondingdeclinesintheSCF.Themediansfor2010aresimilarintheSCF($45,800)andtheCPS($50,600).Typically,theSCFshowsahigherlevelofmeanincomethandoestheCPS;for2010,theSCFyieldsanestimateof $78,500,whiletheCPSyieldsanestimateof$69,100.Asdiscussedinmoredetailintheappendix,thetwo surveysdifferintheirdefinitionsoftheunitsofobservationandinotheraspectsoftheirmethodologies.Most relevanthereisthefactthataCPShouseholdcancontainmorepeoplethanacorrespondingSCFfamily.Ifthe SCFmeasureisexpandedtoincludetheincomeofhouseholdmembersnotincludedintheSCFdefinitionof afamily,themedianfalls5.6percentovertheperiod(from$51,700in2007to$48,800in2010),andthemean falls10.8percent(from$90,800in2007to$81,000in2010).Thesubstantialdifferenceinmeanlevelsislikely theresultofthetruncationoflargevaluesintheCPSdataaboveacertainamount,whichisdonewiththe intentofminimizingthepossibilitythatparticipantsinthatsurveymightbeidentifiable.
34 FederalReserveBulletin|June2012 Table1.Before-taxfamilyincome,percentageoffamiliesthatsaved,anddistributionoffamilies,by selectedcharacteristicsoffamilies,2001–10surveys Thousandsof2010dollarsexceptasnoted 2001 2004 Familycharacteristic Income Percentageof Income Percentageof Percentageof Percentage familiesthat familiesthat families offamilies Median Mean saved Median Mean saved Allfamilies 48.9 83.3 59.2 100.0 49.8 81.4 56.1 100.0 (1.0) (2.4) (1.0) (1.4) Percentileofincome Lessthan20 12.6 12.3 30.0 20.0 12.8 12.4 34.0 20.0 20–39.9 29.9 29.6 53.4 20.0 29.5 30.0 43.3 20.0 40–59.9 48.9 49.4 61.3 20.0 49.8 50.0 54.5 20.0 60–79.9 79.4 79.9 72.0 20.0 78.5 79.6 69.3 20.0 80–89.9 120.9 120.2 74.9 10.0 120.5 122.6 77.8 10.0 90–100 207.8 371.0 84.3 10.0 212.7 347.7 80.6 10.0 Ageofhead(years) Lessthan35 40.9 54.2 52.9 22.7 37.8 51.9 55.0 22.2 35–44 63.0 94.5 62.3 22.3 57.5 85.0 58.0 20.6 45–54 66.8 114.2 61.7 20.6 70.3 108.6 58.5 20.8 55–64 55.4 106.5 62.0 13.2 62.6 115.5 58.5 15.2 65–74 34.0 71.3 61.8 10.7 38.4 68.7 57.1 10.5 75ormore 27.4 45.0 55.5 10.4 27.3 47.1 45.7 10.7 Familystructure Singlewithchild(ren) 27.7 36.0 45.2 11.4 29.5 37.7 39.8 12.1 Single,nochild,ageless than55 35.3 49.4 55.8 15.1 33.3 45.2 52.8 15.3 Single,nochild,age55 ormore 20.8 39.9 49.5 13.2 24.5 39.2 45.9 14.6 Couplewithchild(ren) 76.5 115.0 61.9 31.1 75.6 113.9 61.7 31.7 Couple,nochild 63.0 105.3 68.1 29.2 67.4 107.0 64.4 26.3 Educationofhead Nohighschooldiploma 20.8 30.8 38.7 16.0 22.3 29.8 35.9 14.4 Highschooldiploma 41.6 54.9 56.7 31.7 41.1 51.5 54.0 30.6 Somecollege 50.1 68.0 61.7 18.3 47.3 64.5 51.0 18.4 Collegedegree 83.1 142.9 70.0 34.0 84.4 135.3 68.3 36.6 Note:Forquestionsonincome,respondentswereaskedtobasetheiranswersonthecalendaryearprecedingtheinterview.Forquestionson saving,respondentswereaskedtobasetheiranswersonthe12monthsprecedingtheinterview. Percentagedistributionsmaynotsumto100becauseofrounding.Dollarshavebeenconvertedto2010valueswiththecurrent-methods consumerpriceindexforallurbanconsumers(seethebox"TheDataUsedinThisArticle").Seetheappendixfordetailsonstandarderrors (showninparenthesesbelowthefirstrowofdataforthemeansandmedianshereandintable4)andfordefinitionsoffamilyandfamilyhead. 2.4percentagepoints;andthatof transfersorotherincomerose1.3percentagepoints.The shareof incomefrominterestordividendswaslittlechanged.Thedeclineintheshareof capitalgainswaslargestamongthewealthiest10percentof families.Asshowninthetable, wageincometendstobeasmallerfactorforthehighestwealthgroup. Somepatternsof incomedistributionholdgenerallyacrosstheyearsof SCFdatashownin table1.6Acrossageclasses,medianandmeanincomesshowalife-cyclepattern,risingtoa peakinthemiddleagegroupsandthendecliningforgroupsthatareolderandincreasingly 6 Tabularinformationfromthesurveybeyondthatpresentedinthisarticleisavailableatwww.federalreserve.gov/ econresdata/scf/scf_2010.htm.Thisinformationincludesversionsofallofthenumberedtablesinthisarticle, forallofthesurveysfrom1989to2010wheretheunderlyinginformationisavailable.Meanvaluesforthe demographicgroupsreportedinthisarticlearealsoprovided.Theestimatesofthemeans,however,aremore likelytobeaffectedbysamplingerrorthanaretheestimatesofthemedians.Inaddition,somealternativeversionsofthetablesinthisarticlearegiven.Forthosewhowishtomakefurtheralternativecalculations,this websiteprovidesavarietyofdatafilesaswellasaccesstoonlinetabulationsoftwarethatmaybeusedtocreate customizedtablesbasedonthevariablesanalyzedinthisarticle.
ChangesinU.S.FamilyFinancesfrom2007to2010 35 Table1.Before-taxfamilyincome,percentageoffamiliesthatsaved,anddistributionoffamilies,by selectedcharacteristicsoffamilies,2001–10surveys—continued Thousandsof2010dollarsexceptasnoted 2001 2004 Familycharacteristic Income Percentageof Income Percentageof Percentageof Percentage familiesthat familiesthat families offamilies Median Mean saved Median Mean saved Raceorethnicityofrespondent Whitenon-Hispanic 55.4 94.3 63.1 75.4 56.9 92.9 60.1 72.2 NonwhiteorHispanic 31.5 49.9 47.4 24.6 34.3 51.7 45.6 27.8 Currentworkstatusofhead Workingfor someoneelse 57.9 82.5 61.6 60.9 56.7 80.7 59.2 60.1 Self-employed 77.6 169.5 70.4 11.7 76.8 162.9 68.7 11.8 Retired 25.7 49.0 50.5 23.0 28.1 49.7 44.0 23.7 Othernotworking 20.4 44.9 42.7 4.5 23.6 43.0 44.9 4.4 Currentoccupationofhead Managerialor professional 87.2 153.4 72.4 27.1 88.9 147.6 67.7 28.3 Technical,sales,or services 44.1 65.3 58.2 23.7 43.1 61.1 55.4 22.1 Otheroccupation 50.4 60.0 56.6 21.8 52.0 58.3 57.3 21.6 Retiredorothernot working 25.4 48.3 49.2 27.4 27.4 48.7 44.1 28.1 Region Northeast 50.6 95.2 58.1 19.0 58.5 100.7 59.5 18.8 Midwest 53.8 79.3 63.0 23.0 52.0 77.7 59.9 22.9 South 44.1 75.2 57.3 36.2 42.5 71.3 52.5 36.3 West 49.9 90.7 59.5 21.8 53.2 85.8 55.2 22.0 Urbanicity Metropolitanstatistical area(MSA) 50.4 88.7 59.7 86.2 53.2 88.5 56.9 82.9 Non-MSA 37.0 50.2 56.3 13.8 34.4 47.2 52.3 17.1 Housingstatus Owner 63.8 104.3 66.7 67.7 63.5 100.6 62.3 69.1 Renterorother 30.2 39.5 43.6 32.3 28.4 38.8 42.3 30.9 Percentileofnetworth Lessthan25 24.1 29.4 34.5 25.0 23.6 28.8 34.7 25.0 25–49.9 42.8 48.5 54.2 25.0 42.5 48.5 53.7 25.0 50–74.9 62.6 72.2 68.2 25.0 60.3 69.8 62.1 25.0 75–89.9 85.3 96.3 77.4 15.0 88.6 101.2 72.6 15.0 90–100 155.0 313.8 84.1 10.0 165.4 294.6 76.0 10.0 morelikelytoberetired.Couples(familiesinwhichthefamilyheadwaseithermarriedor livingwithapartner)tendtohavehigherincomesthansinglepersons,inpartbecause coupleshavemorepotentialwageearners.Incomealsoshowsastrongpositiveassociation witheducation;inparticular,incomesforfamiliesheadedbyapersonwhohasacollege degreetendtobesubstantiallyhigherthanforthosewithanylesseramountof schooling. Incomesof whitenon-Hispanicfamiliesaresubstantiallyhigherthanthoseof otherfamilies.7Familiesheadedbyaself-employedworkerconsistentlyhavethehighestmedianand meanincomesof allwork-statusgroups.Familiesheadedbyapersoninamanagerialor professionaloccupationhavehigherincomesthanfamiliesinthethreeremainingoccupationcategories.Incomeisalsohigherforhomeownersthanforotherfamilies,anditisprogressivelyhigherforgroupswithgreaternetworth.8Acrossthefourregionsof thecountry asdefinedbytheCensusBureau,theorderingof medianincomesovertimehasvaried,but 7 SeetheappendixforadiscussionofracialandethnicidentificationintheSCF. 8 Inthisarticle,afamilyistreatedasahomeownerifatleastonepersoninthefamilyownsatleastsomepartof thefamily’sprimaryresidence.
36 FederalReserveBulletin|June2012 Table1.Before-taxfamilyincome,percentageoffamiliesthatsaved,anddistributionoffamilies,by selectedcharacteristicsoffamilies,2001–10surveys––continued Thousandsof2010dollarsexceptasnoted 2007 2010 Familycharacteristic Income Percentageof Income Percentageof Percentageof Percentage familiesthat familiesthat families offamilies Median Mean saved Median Mean saved Allfamilies 49.6 88.3 56.4 100.0 45.8 78.5 52.0 100.0 (.8) (1.4) (.6) (1.2) Percentileofincome Lessthan20 12.9 12.9 33.7 20.0 13.4 12.9 32.3 20.0 20–39.9 30.1 29.7 45.0 20.0 28.1 27.9 43.4 20.0 40–59.9 49.6 49.5 57.8 20.0 45.8 46.3 49.8 20.0 60–79.9 78.7 80.2 66.8 20.0 71.7 73.6 60.1 20.0 80–89.9 119.5 121.6 72.9 10.0 112.8 114.6 67.7 10.0 90–100 216.8 416.6 84.8 10.0 205.3 349.0 80.9 10.0 Ageofhead(years) Lessthan35 39.2 54.2 58.9 21.6 35.1 47.7 54.6 21.0 35–44 59.3 87.7 56.4 19.6 53.9 81.0 47.6 18.2 45–54 67.2 117.8 55.8 20.8 61.0 102.2 51.8 21.1 55–64 57.2 116.5 58.4 16.8 55.1 105.8 51.4 17.5 65–74 40.8 96.8 56.7 10.5 42.7 75.8 53.6 11.5 75ormore 23.9 47.9 49.4 10.6 29.1 46.1 54.1 10.7 Familystructure Singlewithchild(ren) 30.2 44.1 41.6 12.2 29.5 39.4 38.2 12.0 Single,nochild,ageless than55 35.5 49.4 54.9 14.0 30.5 42.4 49.8 14.7 Single,nochild,age55 ormore 25.8 38.4 48.5 14.9 24.2 39.6 45.4 15.2 Couplewithchild(ren) 74.6 118.4 60.1 31.8 67.7 109.4 52.8 31.6 Couple,nochild 64.6 120.5 64.0 27.1 61.8 101.7 62.2 26.5 Educationofhead Nohighschooldiploma 23.2 32.8 41.6 13.5 23.0 33.7 36.9 12.0 Highschooldiploma 38.5 53.6 51.1 32.9 36.6 48.1 47.4 32.2 Somecollege 47.8 71.3 53.6 18.4 42.9 58.7 49.5 18.6 Collegedegree 81.9 150.7 68.6 35.3 73.8 128.9 62.0 37.3 themeansgenerallyshowhighervaluesfortheNortheastandtheWestthanfortheMidwestandtheSouth.Finally,familieslivinginmetropolitanstatisticalareas(MSAs),which arerelativelyurbanareas,havehighermedianandmeanincomesthanthoselivinginrural areas.9 Income by Demographic Category Acrosstheincomedistributionbetween2007and2010,onlythelowestquintiledidnot experienceasubstantialreductioninmedianincome;themedianforthatgrouprose $500.10Forothergroups,themediandecreasedbetween5.3percentand8.9percent between2007and2010.Similarly,forallincomegroupsexceptthelowestquintile,the directionof changesinmeanincomewasuniformlynegative,withdecreasesrangingfrom a5.8percentdropforthesecond-highestdeciletoa16.2percentdropforthetopdecile. Thedisproportionbetweenchangesinmedianandmeanincomesforthetopdecile(a 5.3percentdropinthemedian,comparedwitha16.2percentdeclineinthemean)estab- 9 FortheOfficeofManagementandBudget’sdefinitionofMSAs,seewww.whitehouse.gov/omb/bulletins/ fy2008/b08-01.pdf. 10 Selectedpercentilesoftheincomedistributionforthepastfoursurveysareprovidedintheappendix,along withdefinitionsofselectedsubgroupsofthedistribution.
ChangesinU.S.FamilyFinancesfrom2007to2010 37 Table1.Before-taxfamilyincome,percentageoffamiliesthatsaved,anddistributionoffamilies,by selectedcharacteristicsoffamilies,2001–10surveys––continued Thousandsof2010dollarsexceptasnoted 2007 2010 Familycharacteristic Income Percentageof Income Percentageof Percentageof Percentage familiesthat familiesthat families offamilies Median Mean saved Median Mean saved Raceorethnicityofrespondent Whitenon-Hispanic 54.3 101.6 58.8 70.7 52.9 90.1 55.8 67.5 NonwhiteorHispanic 38.6 56.2 50.8 29.3 34.6 54.4 44.0 32.5 Currentworkstatusofhead Workingfor someoneelse 59.3 87.1 60.3 59.9 55.9 84.2 55.2 56.9 Self-employed 79.3 201.0 62.8 10.5 64.5 149.9 55.1 11.4 Retired 25.9 53.5 46.6 25.0 29.1 44.4 47.3 24.9 Othernotworking 21.3 37.1 45.3 4.6 23.9 36.3 37.0 6.8 Currentoccupationofhead Managerialor professional 89.4 163.6 70.2 27.5 81.3 148.7 62.9 27.7 Technical,sales,or services 46.3 70.8 55.6 21.8 42.0 59.5 49.0 21.7 Otheroccupation 51.7 60.7 53.6 21.1 50.0 57.3 51.1 18.8 Retiredorothernot working 24.9 51.0 46.4 29.6 27.4 42.7 45.1 31.7 Region Northeast 53.9 105.2 53.5 18.3 53.7 99.2 50.8 18.3 Midwest 46.3 78.5 58.2 22.9 46.5 70.9 57.2 22.4 South 45.0 83.1 56.9 36.7 40.7 71.5 49.8 37.1 West 54.4 92.9 56.3 22.1 48.8 80.8 51.4 22.2 Urbanicity Metropolitanstatistical area(MSA) 52.8 95.6 57.0 82.9 48.8 84.8 51.7 82.7 Non-MSA 37.8 52.6 54.0 17.1 36.7 48.2 53.3 17.3 Housingstatus Owner 64.6 110.7 60.9 68.6 59.6 98.3 56.5 67.3 Renterorother 29.1 39.3 46.7 31.4 26.1 37.9 42.7 32.7 Percentileofnetworth Lessthan25 24.6 30.5 40.5 25.0 23.7 32.6 32.2 25.0 25–49.9 43.1 48.7 52.8 25.0 37.9 45.5 48.4 25.0 50–74.9 59.5 69.8 59.1 25.0 54.9 63.3 56.8 25.0 75–89.9 86.2 97.4 68.9 15.0 74.5 89.0 66.9 15.0 90–100 165.5 364.2 80.4 10.0 163.2 297.9 76.1 10.0 lishesathemethatisrepeatedforincomechangesformanyothergroupsconsideredinthis article.Often,suchadifferencebetweenthechangesinamedianandameanistakento indicaterelativecompressionof highervaluesinthedistribution. Thedeclineinmeanincomesinthetopdecilebetween2007and2010standsinstarkcontrasttothegenerallysteadypatternof risingmeanincomesatthetopof theincomedistributionoverthepasttwodecades.Indeed,theonlyotherdecreasesinmeanincome observedforthetopdecileoccurredintheperiods1989to1992and2001to2004,whenthe recoveryfromearlierrecessionswasaffectingfamiliesbroadly. Everyagegrouplessthan55sawdecreasesinmedianincomeof between9.1and10.5percent,whilefamiliesheadedbyapersonbetween65and74or75ormoresawincreasesat themedian.Incontrasttothechangesatthemedians,themeansfellforallagegroupsbut especiallyforthe65-to-74agegroup(adeclineof 21.7percent).Inalmosteveryagegroup, thedeclineinthemeanwasgreaterthanthedeclineinthemedian.
38 FederalReserveBulletin|June2012 Table2.Amountofbefore-taxfamilyincome,distributedbyincomesources,bypercentileofnetworth, 2007and2010surveys Percent Percentileofnetworth Incomesource Allfamilies Lessthan25 25–49.9 50–74.9 75–89.9 90–100 2007SurveyofConsumerFinances Wages 79.9 80.0 77.7 72.3 46.2 64.5 Interestordividends .1 .3 .7 1.9 7.8 3.7 Business,farm, self-employment 1.8 5.3 6.9 7.9 24.7 13.6 Capitalgains .1 .4 1.3 2.9 14.4 6.7 SocialSecurityorretirement 9.5 10.9 11.8 14.2 6.2 9.6 Transfersorother 8.6 3.2 1.6 .8 .7 1.9 Total 100 100 100 100 100 100 2010SurveyofConsumerFinances Wages 75.9 80.7 76.3 69.7 55.8 68.1 Interestordividends .1 .1 .4 1.6 8.7 3.6 Business,farm, self-employment 3.5 4.6 4.8 7.2 23.9 12.2 Capitalgains .1 .2 .1 –.2 2.3 .9 SocialSecurityorretirement 9.4 9.6 15.9 20.1 7.8 12.0 Transfersorother 11.1 4.7 2.5 1.7 1.5 3.2 Total 100 100 100 100 100 100 Byfamilystructure,medianincomesdeclinedoverthe2007–10periodforallgroups,but mostnotably(negative14.1percent)forchildlesssinglefamilies(thoseheadedbyaperson whowasneithermarriednorlivingwithapartner)headedbyapersonagedlessthan55; medianincomefelltheleast(2.3percent)forsinglefamilieswithchildren.Meanincome alsofellformosttypesof families,exceptchildlesssinglefamiliesheadedbyapersonaged 55orolder,forwhomitrose3.1percent.Meanincomeof childlesscouplesfellthemostof allfamilies,whengroupedbyfamilystructure(15.6percent). In2010,bothmedianandmeanincomesrosesubstantiallywitheducationalattainment, withincomesamongthegroupholdingacollegedegreebeingmorethanthreetimesas highasamongthosewithlessthanahighschooldiploma,andatleasttwiceashighas amongthosewithonlyahighschooldiploma.Between2007and2010,however,the decreasesinincomesweremuchlargerforthehighereducationgroups,andmeanincome actuallyrosefortheno-high-school-diplomagroup(albeitfromthemuchlowerstarting point).Thispatternof changereversedtherelativelyfastergrowthof meanincomefor higher-educatedfamiliesthathadoccurredbetween2004and2007. Overthe2007–10period,themedianincomeforwhitenon-Hispanicfamiliesfell2.6percent,andthemeanfell11.3percent.Incontrast,themedianfornonwhiteorHispanic familiesfell10.4percent,whilethemeanfell3.2percent.However,boththemedianand themeanvaluesfornonwhitesorHispanicsinbothyearsweresubstantiallylowerthanthe correspondingfiguresfornon-Hispanicwhites.Since1998,thetotalgaininmedianincome fornonwhiteorHispanicfamilieswas11.3percent,whereasitwas3.9percentforother families;thegaininthemeanoverthisperiodwaslargerforbothgroups—22.8percentfor nonwhiteorHispanicfamiliesand14.1percentforotherfamilies.11 11 Asnotedintheappendix,thequestionsunderlyingthedefinitionofraceorethnicitychangedincrementallyin earliersurveys.Whenrestrictionsareplacedonthedefinitionofthevariableforracialandethnicclassification usedinthetablesinthearticletomaketheseriesmorecomparableoveralongerperiod,theestimateschange onlyslightly.
ChangesinU.S.FamilyFinancesfrom2007to2010 39 Medianincomefell5.7percentfrom2007to2010forfamiliesheadedbyapersonwhowas workingforsomeoneelse,butitfellmuchmore(18.7percent)forthosewhowereself-employed;themedianrose12.4percentfortheretiredgroupand12.2percentfortheothernot-workinggroup.12Themeanoverthisperiodfellforallgroups,especiallyfortheselfemployedgroup(adecreaseof 25.4percent)andtheretiredgroup(adecreaseof 17.0percent).Overthepreviousthreeyears,medianincomeshadfallenfortheretiredand theother-not-workinggroupsbuthadrisenforthetwoworkergroups. Acrossoccupationgroups,medianincomefellmostinproportionalterms(9.3percent)for familiesheadedbyapersonworkinginatechnical,sales,orservicejob.Althoughthepercentagedropforfamiliesheadedbyapersoninamanagerialorprofessionalpositionwas onlyslightlysmaller(9.1percent),thedollaramountof theirdeclinewasmuchlarger becausetheir2007medianincomewasmuchhigher.Fortheother-occupationgroup,a groupthatpredominantlycomprisesworkersintraditionalblue-collaroccupations, themedianfellonly3.3percent.Consistentwithevidenceforageorcurrent-work-status groups,medianincomeforfamiliesheadedbyretireesincreased10.0percent.Incontrast, meanincomedecreasedforalloccupationgroups,butespeciallyforthetechnical,sales,or serviceoccupationgroups,forwhomthemeanfell16.0percent,andfortheretiredand other-not-workinggroup,forwhomthemeanfell16.3percent. Byregion,medianfamilyincomesintheNortheastandtheMidwestwerelittlechanged between2007and2010,whilethemediansintheWestandtheSouthdecreasedsubstantially.Thosechangesinmediansstandincontrasttowhatoccurredduringtheperiodfrom 2004to2007,whenmedianincomesfellintheNortheastandMidwestbutincreasedinthe WestandSouth.Theseincomechangesbyregionmirrortheregionalpatternof homeprice changesacrossthetwotimeperiods.Duringthefinalyearsof thehousingboom,which disproportionatelyaffectedtheWestandSouth,medianincomeswererisinginthose regionsbutfallingelsewhere.Duringthesubsequenthousingbust,whichalsodisproportionatelyaffectedthoseareas,medianincomeswerefallingtherebutrisingelsewhere.Mean incomesdeclinedacrossallfourregionsbetween2007and2010,thoughthechangeswere largestfortheSouthandWest. Intherecentthree-yearperiod,familieslivinginanMSAsawa7.6percentdeclinein medianincome,whilethoselivinginother,lessurbanizedareassawadecreaseof 2.9percent.Meanincomealsofellforbothtypesof area—by11.3percentforfamilieslivinginan MSAandby8.4percentforthoselivinginotherareas. Byhousingstatus,medianandmeanincomesfellfrom2007to2010bothforhomeowners andforotherfamilies.Thepercentagedecreaseinmedianincomeforhomeowners(7.7percent)matchedthepercentagedecreaseintheoverallfamilymedianreportedearlier (7.7percent),whilethedecreaseforrenterandotherfamilies(10.3percent)wasgreater. Meanincomedeclinedforbothgroups,butparticularlyforhomeowners—11.2percentfor homeowners,versus3.6percentforotherfamilies.Asnotedlaterinthisarticle,homeownershipcontinuedthedeclinethatbeganbetweenthe2004and2007surveysafterrisingfor severalyearspriortothat.13 12 Tobeincludedintheretiredgroup,thefamilyheadmustreportbeingretiredandnotcurrentlyworkingatany joborreportbeingoutofthelaborforceandovertheageof65.Theother-not-workinggroupcomprises familyheadswhoareunemployedandthosewhoareoutofthelaborforcebutareneitherretirednoroverage 65;thecompositionofthisgroupshiftedslightlyfrom2007to2010toincludefewerfamiliesheadedbyapersonwhohadacollegedegree,continuingatrendbetween2004and2007.In2010,70.0percentoftheothernot-workinggroupwasunemployed,andtheremainderwasoutofthelaborforce;in2007,66.6percentofthe groupwasunemployed(datanotshowninthetables). 13 Seebox2,“Cross-SectionalDataandChangesinGroupCompositionoverTime,”foradiscussionofthe
40 FederalReserveBulletin|June2012 Box 2. Cross-Sectional Data and Changes in Group Composition over Time Across-sectionalsurveyofthesortdiscussedinthisarticledescribesthestateofa sampleoffamiliesatagivenpointintime.Thus,whencomparisonismadeofchangesfor groupsofpeopleinfamiliesinsuchsurveysovertime,itisimportanttoconsiderthe degreetowhichinterpretationofthedatamaybeafunctionofchangesinmembershipin thosegroupsovertime.Someclassifications,suchasonesbasedonraceorethnicity, maybefixedcharacteristicsofindividuals,buttheoverallpopulationsofsuchgroupsmay stillchangeovertimethroughbirthsordeaths,throughimmigrationoremigration,orin otherways.Someclassifications,includingthosebasedonage,maychangeinawaythat ismostlypredictable.Butotherclassifications—forexample,onesbasedoneconomic characteristicssuchasincomeorwealth—mayvaryovertimeforsubstantialfractionsof families. Gatheringdataonthesamesetoffamiliesovertimeinapanelsurveyisanalternativeway tounderstandchangesforgroupsoffamiliesdeterminedasofabaselineperiod.To addresstheeffectsonfamiliesoftheperiodoffinancialturmoilbetween2007and2009, theFederalReserveundertookasurveyin2009thatwasintendedtore-interviewthepanel offamiliesthathadparticipatedinthe2007SurveyofConsumerFinances(SCF)forwhich thefamilyheadorthatperson’sspouseorpartnerwasstillaliveandstilllivingintheUnited States.Thispanelsurveyprovidesdetailedinformationonchangesinawidevarietyof characteristicsoffamiliesoverthistwo-yearperiod.1Althoughthepanelsurveycanonly beusedtolookatthefirsttwoyearsoftheperiodcoveredbythecross-sectionalsurveys reportedindetailinthisarticle,itcanprovideausefulindicationofthedegreetowhichthe movementoffamiliesacrossgroupswasimportantfortheinterpretationofthechanges observedbetweenthe2007and2010cross-sectionalSCFs. Familyincomeisoneitemforwhichvariationovertimemightbeexpected,particularly overaperiodofsevererecession.Thepaneldatamakeitpossibletotrackthemovement offamiliesacrossincomegroupsbetween2007and2009(tableA).Thedatashowsubstantialmovementacrossincomegroupsduringthetwo-yearperiod.2Forexample, 69.4percentoffamilieswithincomesinthebottomquintileofthedistributionin2009also hadincomesinthebottomquintilein2007(indicatedbytheboldfontalongthediagonal). Theremainingfractionoffamiliesinthelowestincomegroupin2009hadexperienced higherincomesin2007;in2007,19.1percentwereinthesecondquintilegroup,6.7percentwereinthethirdquintilegroup,3.0percentwereinthefourthquintilegroup,and 1.9percentwereinthehighestquintilegroup. TableA.Movementoffamiliesacrosstheincomedistributionbetween2007and2009 Percentileofincomein2009 Percentileof incomein2007 Lessthan20 20–39.9 40–59.9 60–79.9 80–100 Lessthan20 69.4 22.0 5.4 2.1 1.1 20–39.9 19.1 48.9 23.5 6.5 2.0 40–59.9 6.7 21.4 45.1 22.9 4.0 60–79.9 3.0 6.5 22.4 50.3 17.8 80–100 1.9 1.2 3.5 18.3 75.1 All 100 100 100 100 100 Note:Figuresinboldalongthediagonalshowthefractionoffamiliesinthegiven2007quintilegroupthatwereinthesamequintilegroupin 2009. Themovementsoffamiliesacrossincomegroupsintwoyearswasmoresubstantialfor thethreecentralpercentilegroupsthanforfamilieswithincomesinthetwoextreme groups,inpartbecausefamiliesinoneoftheextremegroupscouldmoveinonlyone direction.Amongfamiliesinthesecond,third,andfourthincomequintilegroupsin2009, onlyabouthalfhadbeeninthesamegroupin2007.Theincomegroupwiththehighest persistenceofmembershipacrossthetwoyearswasthetopquintile;amongfamiliesin 2009whoseincomewashighenoughtobeinthetopquintile,75.1percenthadalsohad incomesinthetopquintilein2007. continuedonnextpage potentialeffectsofchangesinthecompositionofgroupsontheinterpretationofchangesinmedianandmean valuesforthegroups.
ChangesinU.S.FamilyFinancesfrom2007to2010 41 Box 2—continued Trackingchanges,suchastheseshiftsinincome,foragivenpopulationovertimeisinterestinginitsownright,butthatinformationmayalsohaveimportantimplicationsforinterpretingchangesinagivenmeasure,includingmeannetworth,forgroupsdefinedusing cross-sectionaldata.Whenthereisarearrangementoffamiliesacrosssuchgroupsover timeandestimatesforthegroupsareaffectedbythatchangeincomposition,theestimatesaresaidtoreflect“compositioneffects.”Inlightofthelargeeconomicshiftsinthe overalleconomyduringthetimecoveredbythecross-sectionalsurveysdiscussedinthis bodyofthisarticle,movementsoffamiliesacrosssomecategoriesmaybeparticularly important. Onesuchexampleistheeffectofchangesinthecompositionofthelowestincomedecile from2007to2009onestimatesofthegroupmedianofnetworthfor2009.Thepaneldata makeitpossibletodecomposethiseffectdirectly,bylookingatthe2009mediansofthe membersofthisgroup,butwiththefamiliesseparatedbasedontheir2007incomegroup (tableB).Theoverallmediannetworthforthelowestincomequintilein2009was$10,000. Amongfamiliesinthelowestquintilegroupin2009,thosewhowerealsointhegroupin 2007hadmediannetworthin2009of$4,500,thosewhowereinthesecondquintilegroup in2007hadmediannetworthin2009of$19,200,thosewhowereinthethirdquintile groupin2007hadmediannetworthin2009of$32,000,andthoseinthetwohigherquintilegroupsin2007hadprogressivelyhighermediannetworthin2009—upto$740,500for thetopquintilegroup.Thesecondandthirdofthesegroupsconstitutedoverone-fourthof thelowest2009quintilegroup.Themediannetworthoffamiliesexitingthelowestincome quintilebetween2007and2009was$13,300(datanotshowninthetables).Thehigher mediansofthefamiliesenteringthisgroupbetween2007and2009helpedpushupthe overallmediannetworthofthegroupfor2009. TableB.Networthoffamiliesinthelowestincomequintilein2009,sortedbytheir incomerankingin2007 Percentileofincomein2007 Mediannetworth Lessthan20 4,500 20–39.9 19,200 40–59.9 32,000 60–79.9 166,700 80–100 740,500 All 10,000 Ofcourse,the2007incomegroupinthisexamplemayalsohaveincorporatedcompositioneffectsrelativetosomeotherpointofreference.Ifthemovementoffamiliesacross incomegroupsovertimetookplaceaccordingtoaconstantpattern,the2007and2009 cross-sectionalestimatesmighthavecomparablecomposition.Giventhenatureofthe recessionoverthisperiodandtheevidenceonunusualincomepresentedinthebodyof thearticle,thatpossibilityseemsunlikely. Compositioneffectsmayvaryacrosscategories,outcomesofinterest,andtimeperiods. Forexample,consideraverynarrowlyheldassetorliabilitywhoseownershipisdominated byfamilieswhoseincomeisusuallyrelativelyhigh,astendstobethecasefordirectlyheld stocks.Themedianvaluefordirectlyheldstocksinagivenincomequintilemightbesensitivetothefractionoffamiliesinthatincomequintilewhoseusualincomewasdifferent fromtheircurrentincome.If,asinthe2009panelinterview,therewasasubstantialfraction offamiliesinthelowestquintilegroupwhoseincomewasusuallymuchhigher,thosefamiliesmightbringwiththemownershipratesandvaluesforstockholdingsthatweregenerallyhigherthanthoseforfamilieswhoseincomesareusuallylow.The2010SCFcrosssectionaldataindicatethatownershipratesormedianvaluesforsomenarrowlyheld financialassetsforlower-incomefamiliesseemtohaverisenbetween2007and2010.In lightoftheavailableevidence,amorelikelyexplanationseemstobethatsomesuch changesinownershipormedianvaluesweresubstantiallyaffectedbythesortsofcompositionaleffectsdescribedhere. continuedonnextpage
42 FederalReserveBulletin|June2012 Box 2—continued 1 SeeJesseBricker,BrianBucks,ArthurKennickell,TraciMach,andKevinMoore(2011),“SurveyingtheAftermath oftheStorm:ChangesinFamilyFinancesfrom2007to2009,”FinanceandEconomicsDiscussionSeries2011-17 (Washington:BoardofGovernorsoftheFederalReserveSystem,March),www.federalreserve.gov/pubs/feds/2011 /201117/201117pap.pdf;andArthurB.Kennickell(2012),“TossedandTurned:WealthDynamicsofU.S. Households2007–2009,”FinanceandEconomicsDiscussionSeries2011-51(Washington:BoardofGovernorsof theFederalReserveSystem,January;paperdatedNovember7,2011),www.federalreserve.gov/pubs/feds/2011/ 201151/201151pap.pdf. 2 Thetableshowsequal-sizedpercentilegroups,thehighestofwhichcomprisestwopercentilegroupsusedinthe analysispresentedinthearticle.Ofthefamilieswithincomesinthe80th-to-90thpercentilesofthedistributionin 2009,49.0percentwereinthesamegroupin2007,38.3percentwereinoneofthebottomfourgroupsshownin thetable,and12.6percenthadincomesbetweenthe90thand100thpercentiles.Ofthefamilieswithincomesin the90th-to-100thpercentilesofthedistributionin2009,71.4percentwereinthesamegroupin2007,11.4percent wereinoneofthebottomfourgroupsshowninthetable,and17.2percenthadincomesbetweenthe80thand 90thpercentiles. Bypercentileof networth,medianincomefellforeverygroup,withthesmallestdecline occurringforthetop10percentof wealthholders,forwhomincomefell1.4percent.The declineinmedianincomewasalsorelativelysmallforthelowestquartile,forwhichthe medianfell3.7percent;themediandeclinedmostforthemiddleincomegroups(12.1percentforthesecondquartile,7.7percentforthethirdquartile,and13.6percentforthe groupbetweenthe75thand90thpercentiles).14Thepatternof changesinthemeanbynet worthgroupwassomewhatdifferent,withmeanincomeinthebottomquartilerising 6.9percentandthemeanincomeinthetopdecilefalling18.2percent.Thisdifferentialpatternmaybeattributableinparttocompositioneffects.Forexample,somefamilieswith incomessufficienttosupportarelativelylargehomemortgagemayhavelostenoughof theirhomeequityoverthethree-yearperiodforthemtohavebeenpushedintothelowest wealthgroup,wheretheirincomeswouldberelativelylarge. Income Variability Foragivenfamily,incomeataparticulartimemaynotbeindicativeof its“usual”income. Unemployment,abonus,acapitallossorgain,orotherfactorsmaycauseincometodeviatetemporarilyfromtheusualamount.AlthoughtheSCFisnormallyacross-sectional survey,itdoesprovidesomeinformationonincomevariability.In2010,25.3percentof familiesreportedthattheirincomefortheprecedingyearwasunusuallylow,whereasonly 14.4percentof familieshadreportedunusuallylowincomein2007.Incontrast,only 6.0percentof familiesreportedthattheirincomewasunusuallyhigh,downfrom9.2percentin2007(datanotshowninthetables).Forthosereportingunusualincomeineither direction,themediandeviationof actualincomefromtheusualamountwasnegative 27.4percentof thenormallevel;thesamestatisticwasnegative22.0percentin2007. Althoughafamily’sincomemayvary,suchvariabilitymaybeawell-recognizedpartof its financialplanning.TheSCFdataovertherecentthree-yearperiodshowsomeincreasein thefamilies’uncertaintyabouttheirfutureincome.In2010,35.1percentof families reportedthattheydidnothaveagoodideaof whattheirincomewouldbeforthenext year,and29.0percentreportedthattheydonotusuallyhaveagoodideaof theirnext year’sincome.Thecorrespondingfiguresfor2007werelower,at31.4percentand27.2percent,respectively. 14 Selectedpercentilesofthedistributionofnetworthforthepastfoursurveysareprovidedintheappendix.
ChangesinU.S.FamilyFinancesfrom2007to2010 43 Saving Becausesavingoutof currentincomeisanimportantdeterminantof familynetworth,the SCFasksrespondentswhether,overtheprecedingyear,thefamily’sspendingwasless than,morethan,oraboutequaltoitsincome.Thoughonlyqualitative,theanswersarea usefulindicatorof whetherfamiliesaresaving.Askinginsteadforaspecificdollaramount wouldrequiremuchmoretimefromrespondentsandwouldlikelylowertherateof responsetothesurvey. Overall,from2007to2010,theproportionof familiesthatreportedthattheyhadsavedin theprecedingyearfellsubstantially,from56.4percentto52.0percent.Thatdecrease pushedthefractionof familiesreportingsavingtothelowestlevelsincetheSCFbegancollectingsuchinformationin1992.Thegeneralpatternof changesacrossdemographic groupsintherecentthree-yearperiodisalsooneof decline,asretireesweretheonlygroup reportinganincreaseinthefractionthatsaved. Estimatesof thepersonalsavingratefromthenationalincomeandproductaccounts (NIPA)showanannualsavingrateof 5.3percentbetween2008and2010,upsubstantially fromthe2.2percentrateoverthe2005–07period.Thisdivergenceintrendaroseinpart becausetheSCFandNIPAconceptsof savingdifferinsomeimportantways.First,the underlyingSCFquestionasksonlywhetherthefamily’sspendinghasbeenlessthan,more than,oraboutthesameasitsincomeoverthepastyear.Thus,whilethefractionof familiessavingmaybesmaller,thosewhoaredoingsomaybesavingarelativelylargeamount; thosewhoarespendingmorethantheirincomesmaybespendingarelativelysmall amount.Second,theNIPAmeasureof savingreliesondefinitionsof incomeandconsumptionthatmaynotbethesameasthosethatrespondentshadinmindwhenanswering thesurveyquestions.Forexample,theNIPAmeasureof personalincomeincludespaymentsemployersmaketotheiremployees’defined-benefitpensionplansbutnotthepaymentsmadefromsuchplanstofamilies,whereastheSCFmeasureincludesonlythelatter. TheSCFmeasurealsoincludesrealizedcapitalgains,whereastheNIPAmeasureexcludes suchgains. Aseparatequestioninthesurveyasksaboutfamilies’moretypicalsavinghabits.In2010, 6.0percentof familiesreportedthattheirspendingusuallyexceedstheirincome;19.6percentreportedthatthetwoareusuallyaboutthesame;34.8percentreportedthattheytypicallysaveincome“leftover”attheendof theyear,incomeof onefamilymember,or “unusual”additionalincome;and39.6percentreportedthattheysaveregularly(datanot showninthetables).Theseestimatesshowasmalldecreasebetween2007and2010in theshareof familieswhoreportedregularsaving,butingeneral,thefactthatthesefigures arenotmuchchangedoverthepastseveralsurveyssuggeststhateconomicconditionsover thisperiodhadonlymodesteffectsonthelonger-runsavingplansof families. TheSCFalsocollectsinformationonfamilies’mostimportantmotivationsforsaving (table3).15In2010,themostfrequentlyreportedmotivewasliquidityrelated(35.2percent of families),aresponsethatisgenerallytakentobeindicativeof savingforprecautionary reasons,andthenextmostfrequentlyreportedresponsewasretirementrelated(30.1percentof families).16Atleastsince1998,thesetworesponseshavebeenmostfrequently reported,butsavingforretirementwasmarginallymorelikelytobereportedthansaving 15 Althoughfamilieswereaskedtoreporttheirmotivesforsavingregardlessofwhethertheywerecurrentlysaving,somefamiliesreportedonlythattheydonotsave.Theanalysishereisconfinedtothefirstreasonreported byfamilies. 16 Liquidity-relatedreasonsinclude“emergencies,”thepossibilitiesofunemploymentandillness,andtheneedfor readymoney.
44 FederalReserveBulletin|June2012 Table3.Reasonsrespondentsgaveasmostimportantfortheirfamilies'saving,distributedbytypeof reason,2001–10surveys Percent Typeofreason 2001 2004 2007 2010 Education 10.9 11.6 8.4 8.2 Forthefamily 5.1 4.7 5.5 5.7 Buyingownhome 4.2 5.0 4.2 3.2 Purchases 9.5 7.7 10.0 11.5 Retirement 32.1 34.7 34.0 30.1 Liquidity 31.2 30.0 32.0 35.2 Investments 1.0 1.5 1.6 1.2 Noparticularreason 1.1 .7 1.1 1.4 Whenaskedforareason,reporteddo notsave 4.9 4.0 3.3 3.5 Total 100 100 100 100 Note:Seenotetotable1andtextnote15. forliquidity,untilthe2010survey.Education-relatedmotivesalsoappeartobeimportant, butlesssothanin2007;in2010,8.2percentof familiesreporteditastheirprimarymotive, downonlyslightlyfrom2007butdown3.4percentagepointssince2004.Thefrequencyof reportingsavingforpurchasesrose1.5percentagepointsfrom2007to2010toalevel 3.8percentagepointsabovethatin2004. Thesurveyasksfamiliestoestimatetheamountof savingstheyneedforemergenciesand otherunexpectedcontingencies,ameasureof desiredsavingsforprecautionarypurposes.17 Thedesiredamountincreaseswithincome,butasshownbythefollowingtable,the amountisasimilarpercentageof usualincomeacrosslevelsof suchincome: Table3.1 Medianofdesired Medianofratio Family precautionarysaving ofdesiredamount characteristic (2010dollars) tousualincome(percent) Allfamilies 5,000 10.8 Percentileofusualincome Lessthan20 2,000 14.1 20–39.9 4,000 12.3 40–59.9 5,000 9.8 60–79.9 10,000 10.2 80–89.9 10,000 8.9 90–100 30,000 12.1 Overall,theamountof suchdesiredsavingswaslittlechangedfrom2007,butitroseoverall andformostincomegroupsasapercentageof usualincome,largelybecauseusualincome fellovertherecentthree-yearperiod(datanotshowninthetables). Net Worth From2007to2010,inflation-adjustednetworth(wealth)—thedifferencebetweenfamilies’ grossassetsandtheirliabilities—felldramaticallyintermsof boththemedianandthe 17 ForanextendedanalysisofdesiredprecautionarysavingsasmeasuredintheSCF,seeArthurB.Kennickell andAnnamariaLusardi(2004),“DisentanglingtheImportanceofthePrecautionarySavingMotive,”NBER WorkingPaperSeries10888(Cambridge,Mass.:NationalBureauofEconomicResearch,November).
ChangesinU.S.FamilyFinancesfrom2007to2010 45 Table4.Familynetworth,byselectedcharacteristicsoffamilies,2001–10surveys Thousandsof2010dollars 2001 2004 2007 2010 Familycharacteristic Median Mean Median Mean Median Mean Median Mean Allfamilies 106.1 487.0 107.2 517.1 126.4 584.6 77.3 498.8 (3.7) (8.2) (4.9) (11.2) (5.7) (9.7) (2.8) (12.7) Percentileofincome Lessthan20 9.6 64.7 8.6 83.6 8.5 110.3 6.2 116.8 20–39.9 45.9 141.2 38.8 139.8 39.6 141.3 25.6 127.9 40–59.9 78.0 199.4 82.8 224.0 92.3 220.6 65.9 199.0 60–79.9 176.8 360.7 184.0 392.9 215.7 393.9 128.6 293.9 80–89.9 322.4 560.3 360.9 563.7 373.2 638.1 286.6 567.2 90–100 1,021.5 2,777.1 1,069.7 2,925.2 1,172.3 3,474.7 1,194.3 2,944.1 Ageofhead(years) Lessthan35 14.3 111.2 16.3 84.6 12.4 111.1 9.3 65.3 35–44 95.1 318.6 79.9 345.2 92.4 341.9 42.1 217.4 45–54 164.9 595.9 167.1 625.8 193.7 694.6 117.9 573.1 55–64 227.2 898.6 290.0 976.4 266.2 986.7 179.4 880.5 65–74 217.8 831.4 218.8 795.1 250.8 1,064.1 206.7 848.3 75ormore 190.3 574.8 187.7 607.7 223.7 668.8 216.8 677.8 Familystructure Singlewithchild(ren) 16.2 117.4 24.0 149.9 24.4 187.4 15.5 143.7 Single,nochild,ageless than55 24.0 185.5 24.2 179.8 26.3 217.2 14.6 117.5 Single,nochild,age55 ormore 111.9 355.8 134.0 405.8 150.7 408.9 102.0 391.6 Couplewithchild(ren) 139.3 540.1 140.6 580.5 147.5 629.1 86.7 555.7 Couple,nochild 217.1 790.1 240.2 868.2 236.2 998.6 205.7 864.8 Educationofhead Nohighschooldiploma 31.3 127.5 23.7 157.1 34.8 149.7 16.1 110.7 Highschooldiploma 71.1 222.0 79.1 227.2 84.3 263.8 56.7 218.1 Somecollege 89.8 352.1 79.8 355.7 88.8 384.5 50.9 272.2 Collegedegree 262.2 976.6 260.2 982.3 298.6 1,154.5 195.2 977.7 Raceorethnicityofrespondent Whitenon-Hispanic 150.4 599.0 162.2 648.3 179.4 727.4 130.6 654.5 NonwhiteorHispanic 22.0 144.1 28.5 176.2 29.7 240.3 20.4 175.9 Note:Seenotetotable1. mean(table4).Themedianfell38.8percent,andthemeanfell14.7percent.Thetwoprecedingsurveysshowedsubstantialincreasesinbothmedianandmeannetworth.Thecorrespondingvaluesfortheperiodfrom2004to2007wereincreasesof 17.9percentand 13.1percent.And,fortheperiod2001to2004,thereweresmallerincreases(1.0percent and6.2percent).Meannetworthfelltoaboutthelevelinthe2001survey,andmediannet worthwasclosetolevelsnotseensincethe1992survey(datanotshowninthetables). Althoughtheoverallmeasuresof changeinwealthfromthe2007and2010cross-sectional surveysarenegative,evidencefromthe2007–09SCFpanelsurveysuggeststhattherewas substantialheterogeneityinwealthchangesacrossfamilies;inthatpanel,familiesvariously showedlargegainsinwealthaswellaslosses,thoughtherewasapreponderanceof losses.18 Movementsinthedollarvalueof families’networthare,bydefinition,aresultof changes ininvestment,valuation,andpatternsof ownershipof financialassets(tables5,6,and 7)andnonfinancialassets(tables8,9,and10),aswellasdecisionsaboutacquiringorpayingdowndebt(tables11through17).Avarietyof financialdecisionsunderliethese 18 SeeBricker,Bucks,Kennickell,Mach,andMoore,“SurveyingtheAftermathoftheStorm.”
46 FederalReserveBulletin|June2012 Table4.Familynetworth,byselectedcharacteristicsoffamilies,2001–10surveys—continued Thousandsof2010dollars 2001 2004 2007 2010 Familycharacteristic Median Mean Median Mean Median Mean Median Mean Currentworkstatusofhead Workingfor someoneelse 79.7 276.9 77.4 310.7 98.5 369.1 55.2 298.8 Self-employed 431.7 1,546.5 402.2 1,639.9 407.3 2,057.4 285.6 1,743.6 Retired 141.0 556.4 160.9 539.8 169.9 569.1 151.1 485.3 Othernotworking 9.4 218.4 13.6 186.7 6.0 130.1 11.9 137.5 Currentoccupationofhead Managerialor professional 242.1 942.4 227.3 995.6 258.8 1,174.8 167.3 1,047.0 Technical,sales,or services 57.3 244.7 51.7 284.8 77.0 325.8 32.6 219.1 Otheroccupation 58.9 167.1 65.0 169.8 68.4 201.3 46.6 162.8 Retiredorothernot working 118.2 501.4 127.9 485.0 135.6 500.6 93.5 410.4 Region Northeast 114.3 556.3 186.1 655.0 167.1 684.6 119.9 615.2 Midwest 130.3 418.3 132.4 503.8 112.7 491.2 68.4 399.8 South 90.4 461.4 73.4 401.0 102.0 525.9 68.3 440.8 West 109.0 541.8 109.3 605.3 164.1 695.4 73.4 599.9 Urbanicity Metropolitanstatistical area(MSA) 108.0 525.0 120.1 582.0 138.8 652.6 78.4 553.6 Non-MSA 98.0 250.1 68.2 203.5 82.0 253.9 74.5 236.1 Housingstatus Owner 211.5 687.2 212.6 720.9 246.0 817.6 174.5 713.4 Renterorother 5.9 67.7 4.6 62.3 5.4 74.7 5.1 57.2 Percentileofnetworth Lessthan25 1.4 .1 2.0 –1.6 1.3 –2.3 † –12.8 25–49.9 50.1 54.4 50.2 54.2 56.8 60.9 32.2 35.6 50–74.9 193.6 204.9 196.7 213.7 230.8 238.6 157.2 168.9 75–89.9 528.0 553.5 586.7 608.4 601.2 616.7 482.7 527.9 90–100 1,602.6 3,390.0 1,645.5 3,591.1 1,991.9 4,176.9 1,864.1 3,716.5 †Lessthan0.05($50). changes.Box3,“ShoppingforFinancialServices,”providesadiscussionof theintensityof families’decisionmakingeffortsandtheirsourcesof financialinformation. Byagegroup,medianandmeanvaluesof familynetworthgenerallyincreasewithage, thoughtherearesomesignsof decreaseamongolderagegroups.Thispatternreflectsboth life-cyclesavingbehaviorandahistoricalpatternof long-rungrowthininflation-adjusted wages.Themedianandmeanvaluesof wealthriseintandemwithincome,arelationship reflectingbothincomeearnedfromassetsandahigherlikelihoodof substantialsaving amonghigher-incomefamilies.Wealthshowsstrongdifferentialsacrossgroupsdefinedin termsof familystructure,education,racialorethnicbackground,workstatus,occupation, housingstatus,andtheurbanicityandregionof residence;thesedifferentialsgenerallymirrorthoseforincome,butthewealthdifferencestendtobelarger. Net Worth by Demographic Category Analysisbydemographicgroupforthe2007–10periodshowsapatternof substantial lossesinmedianandmeannetworthformostgroups,butasmallnumberof groupsexperiencedgains.Mostgroupssawdeclinesinthemedianthatfarexceededdeclinesinthe mean.
ChangesinU.S.FamilyFinancesfrom2007to2010 47 Box 3. Shopping for Financial Services Asanormalpartoftheirfinanciallives,familiesmustmakeavarietyofdecisionstoselect particularinvestmentsforanysavingstheymayhave,aswellastoselecttheformsand termsofcredittheymayuse.Totheextentthatfamiliesdevotemoreorlessattentionto suchactivitiesorthattheyarebetterorworseinformed,thewealthofotherwisecomparablefamiliesmaydiffersubstantiallyovertime. TheSurveyofConsumerFinances(SCF)containsaself-assessmentoffamilies’intensity ofshoppingforborrowingorinvestingservices.In2010,53.0percentoffamiliesreported thattheyundertakeamoderateamountofshoppingforborrowing,and54.7percent reportedthattheyundertakeamoderateamountofshoppingforinvesting(tableA).1Only 26.2percentoffamiliesreportedshoppingagreatdealforloanterms,andonly23.3percentreportedshoppingagreatdealforthebesttermsoninvestments.Thesefiguresare littlechangedfrom2007(datanotshowninthetables).Eventhoughthesurveyquestions areintendedtoelicitadescriptionofbehavioringeneral,thebehaviorreportedcouldstill bemorereflectiveoftheshort-termneedsforsuchservicesandconsequentlytheimmediateneedforshopping.Whenbrokenoutbycategoriesofnetworth,thepatternsin2010 aresimilarforallgroupsforloanshopping(datanotshowninthetables).Forinvestment shopping,thedatashowamorepronouncedgradienttowardmore-intensiveshoppingby familieswithhigherlevelsofwealth. TableA.Intensityofshoppingforborrowingorinvesting,2010 Percent Typeofservice Intensityofshopping Borrowing Investing Almostnone 20.8 21.9 Moderateamount 53.0 54.7 Agreatdeal 26.2 23.3 Morefamiliesturntofriends,familymembers,orassociatesforfinancialinformationthan toanyothersourceofinformationonborrowingorinvesting(tableB).Thisresultsuggests thattheremaybeimportantfeedbackeffectsinfinancialoutcomes;thatis,familieswho knowrelativelywell-informedpeoplemayobtainbetterservices.Sellersoffinancialservices—bankers,brokers,andsoon—andtheInternetareeitherthesecondorthirdmost frequentlycitedsourcesofinformationforborrowingorinvesting.TheInternetwas reportedby41.7percentoffamiliesasasourceofinformationonborrowingandby 33.0percentasasourceofinformationoninvesting.Whenviewedacrosscategoriesof networth,thedatashowsimilarpatternsofuseofsourcesofinformationbyallgroups (datanotshowninthetables). TableB.Informationusedfordecisionsaboutborrowingorinvesting,2010 Percent Typeofservice Source Borrowing Investing Callingaround 27.0 15.7 Magazines,newspapers,andothermedia 14.5 14.4 Materialinthemail 28.3 19.0 Internet 41.7 33.0 Friends,relatives,associates 43.9 40.8 Bankers,brokers,andothersellersoffinancialservices 39.5 39.1 Lawyers,accountants,andotherfinancialadvisors 19.5 31.1 Doesnotborroworinvest 14.6 11.7 Note:Figuressumtomorethan100becauseofreportingofmultiplesources. Inadditiontoservingasasourceofinformation,theInternetcanalsobeamediumfor obtainingfinancialservices.In2010,58.5percentoffamiliesreportedusingtheInternetto continuedonnextpage
48 FederalReserveBulletin|June2012 Box 3—continued accessatleastsometypeofserviceatoneofthefinancialinstitutionstheyused(datanot showninthetables).Ifaccessinginformationandusingservicesarecombined,theInternetplayedapartinthefinanciallifeof67.4percentofallfamilies(tableC).Thisfigureisup sharplyfrom59.7percentin2007and46.5percentin2004(datanotshowninthetables). Theproportionofsuchusersrisesstronglyovernetworthgroups:Amongtheleast wealthy25percentoffamilies,60.3percentmadesuchuseoftheInternet,whereasthe figurewas84.4percentforthewealthiest10percent(datanotshowninthetables).More strikingisthevariationoveragegroups.Amongfamiliesheadedbyapersonyoungerthan age35,80.0percentreportedusingtheInternetforfinancialinformationorservices, whereasthefigureforfamilieswithaheadaged75orolderwasonly25.8percent.These figuresarebothupsubstantiallyfromtheirrespectivevaluesin2007—71.9percentand 16.4percent(datanotshownintables).Iftherelativelygreaterexpressionofsuchbehavior byyoungerfamiliespersistsastheyage,andifsucceedingcohortsfollowtheirexample, Internet-basedfinancialservicesmaybecomeevenmoreimportantinthefuture.2 TableC.UseoftheInternetforfinancialinformationorfinancialservices,byageofhead,2010 Percent Familycharacteristic Percentageoffamilies Allfamilies 67.4 Ageofhead(years) Lessthan35 80.0 35–44 77.2 45–54 74.6 55–64 69.0 65–74 51.7 75ormore 25.8 1 Theunderlyingquestionallowsthesurveyrespondenttoshadetheintermediateresponsetowardagreateror lesseramountofshopping.Aboutone-thirdoftherespondentschoosetodoso,andofthose,somewhatmore thanone-halfshadedtheirresponsetowardagreaterdegreeofshopping. 2 Foradiscussionofthedefinitionoflocalbankingmarkets,seeDeanF.Amel,ArthurB.Kennickell,andKevinB. Moore(2008),“BankingMarketDefinition:EvidencefromtheSurveyofConsumerFinances,”Financeand EconomicsDiscussionSeries2008-35(Washington:BoardofGovernorsoftheFederalReserveSystem,August; paperdatedJuly7),www.federalreserve.gov/pubs/feds/2008/200835/200835pap.pdf. Mediannetworthfellforallpercentilegroupsof thedistributionof networth,withthe largestdecreasesinproportionaltermsbeingforthegroupsbelowthe75thpercentile of thenetworthdistribution.From2007to2010,themedianforthelowestquartileof net worthfellfrom$1,300tozero—a100percentdecline;atthesametime,themeanforthe groupfellfromnegative$2,300tonegative$12,800.Forthesecondandthirdquartiles,the medianandmeandeclinesinnetworthweresmallerbutstillsizable;forexample,median networthforthesecondquartilefell43.3percent.Medianandmeannetworthdidnotfall quiteasmuchforthehighernetworthgroups.Forthe75th-to-90thpercentilegroup,the medianfell19.7percentwhilethemeanfell14.4percent.Forthewealthiestdecile,the 11.0percentdeclineinthemeanexceededthe6.4percentdeclineinthemedianforthat group;aswasdiscussedearlierinthecaseof familyincome,thispatternof thechangesin themedianandmeansuggeststhattherewassomecompressionof highervaluesinthe wealthdistribution. Overtherecentthree-yearperiod,mediannetworthdecreasedforallincomegroupsexcept thetopdecile,forwhichitwasbasicallyunchanged;meannetworthfellsubstantiallyforall of thegroupsexceptthelowestquintile,forwhichmeanwealthrose5.9percent.Thebroad middleof theincomedistribution(thegroupsbetweenthe20thand90thpercentiles)saw consistentlylargedropsinmediannetworthbetween2007and2010,withmuchsmaller dropsinmeannetworthwithinthoseincomegroups.Incontrasttothestabilityof the
ChangesinU.S.FamilyFinancesfrom2007to2010 49 medianforthetopdecile,themeanforthatgroupwasdown15.3percentovertherecent three-yearperiod. Theopposingpatternof a27.1percentdeclineinmediannetworthforthelowestincome quintileanda5.9percentincreaseinthemeanforthegroupdiffersfromthepatternsseen fortheothergroups.Tosomeextent,thisfindingreflectscompositioneffects.Box2, “Cross-SectionalDataandChangesinGroupCompositionoverTime”providesan exampleof howincome-relatedcompositionaffectsmediannetworthacrossincome groups. Thesurveyshowssubstantialdeclinesinmedianandmeannetworthbyagegroupbetween 2007and2010,withtheexceptionthatmeannetworthrosemodestly(1.3percent)forthe 75-or-moreagegroup.The35-to-44agegroupsawa54.4percentdeclineinmediannet worthduringthemostrecentthree-yearperiod,andthemeanforthatagegroupfell 36.4percent.Thewealthdecreasesfortheless-than-35agegroupwerealsolarge;the medianfell25.0percentwhilethemeanfell41.2percent.Thedeclinesinmedianandmean networthformiddle-agedfamilies(the45-to-54and55-to-64agegroups)werealsolarge. Byfamilystructure,singlefamiliesheadedbyapersonyoungerthan55withnochildren andcoupleswithchildren(whoalsotendtoberelativelyyoung)hadthelargestdropsin wealthfrom2007to2010inmediannetworth—declinesof 44.5percentand41.2percent, respectively.Singlefamilieswithchildrenandfamiliesheadedbyasinglepersonwhowas aged55orolderandwithoutchildrenalsoexperiencedlargedecreasesinmediannet worth—36.5percentand32.3percent,respectively.Meannetworthfellforallfamilystructuregroupsaswell,thoughtheextentof thedecreasesrangedfrom4.2percent(childless familiesheadedbyasinglepersonaged55orolder)to45.9percent(otherchildlessfamilies headedbyasingleperson). From2007to2010,medianandmeannetworthdecreasedforalleducationgroups.Mirroringthepatternforallfamilies,eachof thefoureducationgroupsexperiencedavery largedeclineinthemedian(rangingfromadropof 53.7percentfortheno-high-school-diplomagrouptoadropof 32.7percentforthehigh-school-educatedgroup)andsmaller declinesinthemean(rangingfrom29.2percentforthesome-collegegrouptoadropof 15.3percentforthecollege-educatedgroup).Thepatternsof changesinmediansand meansacrosseducationgroupsaresimilartothosefortheincomegroups,largelybecause incomeandeducationarestronglycorrelated. Thedatashowlossesfrom2007to2010inmedianandmeanwealthforbothcategoriesof raceorethnicity.Declinesinthemedianwereroughlythesameforwhitenon-Hispanic families(27.2percent)andfornonwhiteorHispanicfamilies(31.3percent).19 However,thedeclineinthemeanwasmuchsmallerforwhitenon-Hispanicfamilies— 10.0percent—thanthedeclinefornonwhiteorHispanicfamilies—26.8percent.Among nonwhiteorHispanicfamilies,thesubgroupof AfricanAmericanfamiliessawadeclineof 13.3percentintheirmediannetworthfrom2007($17,900)to2010($15,500),andtheir meannetworthfell30.4percent,from$140,800to$98,000;overthe2004–07period,the medianforthegrouphadfallen23.9percent,whilethemeanhadrisen10.6percent(data notshowninthetables). 19 IftheadditionalinformationonHispanicorLatinoethnicidentificationavailableintheSCFisusedinthe classificationofthe2010results,themediannetworthofnonwhitesorHispanicswas$22,200,andthemean was$183,600;forotherfamilies,themedianwas$131,900,andthemeanwas$658,500.Thesefiguresareall slightlyhigherthanthecorrespondingvaluesreportedintable4forthelargergroupofnonwhiteorHispanic families.
50 FederalReserveBulletin|June2012 From2007to2010,medianandmeannetworthfellamongallwork-statusgroupsexcept one.Theexceptionwasfamiliesheadedbypersonswhowerenotworking,forreasons otherthanretirement(theother-not-workinggroup),whichshowedincreasesinbothmeasures(albeitfromrelativelylowstartingpoints);inbothyears,thegrouphadthelowestlevelsof bothmedianandmeannetworthof allwork-statusgroups.Thedollaramountsof decreasesinmedianandmeannetworthfortheself-employedgroupwerefarlargerthan thosefortheothergroupsthatexperiencedlossesovertheperiod;inpercentageterms, however,thedecreasesforthisgroupinbothmedianandmeanwealthwerewellbelowthe ratesof declineforfamiliesheadedbyapersonworkingforsomeoneelse. Medianandmeannetworthdecreasedforalloccupationgroupsintherecentthree-year period,buttheydidsomostmarkedlyforfamiliesheadedbyaworkerinatechnical,sales, orserviceoccupation,forwhommediannetworthfell57.7percentandmeannetworthfell 32.8percent.Wealthlossesweresubstantialforeveryotheroccupationgroupaswell,however,withmediandeclinesrangingfrom35.4percent(managerialandprofessionalgroup) to31.0percent(retiredgroup),andmeandeclinesrangingfrom19.1(other-occupation group)to10.9percent(managerialandprofessionalgroup). Between2007and2010,mediannetworthfelldramaticallyforfamilieslivinginallregions of thecountry,butespeciallyforthoselivingintheWest—a55.3percentdecline.Thispatternreflectstheeffectof thecollapseof housingvaluesinseveralpartsof theWestregion. Medianwealthineveryotherregionfell28.2percentormore.Aswiththeoverallpopulationandmostotherdemographicgroupsdiscussedearlier,thedeclineinmeannetworth withineveryregionwassmallerthanthedropinthemedian.IntheSouthandMidwest regions,thepercentagedeclineinthemedianwasabouttwiceaslargeasthepercentagedeclineinthemean,butinpercentageterms,themedianfortheWestfellfourtimesas muchasthemean. Byurbanicityof theplaceof residence,intherecentthree-yearperiod,mediannetworth fellmuchmoredramaticallyinMSAareasthaninnon-MSAareas,butthedeclinesinthe meansweremoresimilar.ThedeclineinmediannetworthinMSAareaswaslargeenough toerasemostof thewideninggapthathaddevelopedsince1998,inlargepartduetoa run-upinhousevalues.MeannetworthremainedmuchhigherinMSAareasthaninnon- MSAareasin2010. Asmightbeexpectedfromthepreviousdiscussionontheroleof thedeclineinhousingvaluesinexplainingmedianandmeanwealthlossesacrossvariousdemographicgroups,there arelargedifferencesinnetworthchangesbyhousingstatus.Mediannetworthforhomeownersfell29.1percentbetween2007and2010,whilethemeanfell12.7percent.The declineinmediannetworthfornon-homeowners(hereafter,renters)wasonly5.6percent, thoughthedeclineinthemeanwasmuchlargerat23.4percent.Rentershavemuchlower medianandmeannetworththanhomeownersinanysurveyyear,sothedollarvalueof wealthlossesfortherentergrouptendedtobemuchsmaller;forexample,themediannet worthof rentersfell$300overthethree-yearperiod,incontrastwith$71,500for homeowners. Assets At97.4percentin2010,theoverallproportionof familieswithanyassetwasbarely changedfrom2007(firsthalf of tables9.Aand9.B,lastcolumn).Overall,thisfigurehas declined0.3percentagepointsince2007(datanotshowninthetables).Acrossdemographicgroups,thepatternof changesintherecentthree-yearperiodismostlyoneof smallincreasesordecreases.Noticeableexceptionsaredeclinesforthefollowinggroups:
ChangesinU.S.FamilyFinancesfrom2007to2010 51 thesecondquintileof theincomedistribution(0.9percentagepoint),familiesheadedbya personagedlessthan35(1.6percentagepoints)orbetween65and74(1.3percentage points),familiesheadedbyapersonwithahighschooldiploma(1.2percentagepoints), andfamiliesinthebottomquartileof thenetworthdistribution(1.2percentagepoints). Formanygroups,thefigureremainedatornear100percent. From2007to2010,medianassetsforfamilieshavinganyassetsfell19.3percent,from $232,100to$187,200(secondhalf of tables9.Aand9.B,lastcolumn),andthemeanfell 12.8percent,from$702,100to$612,300(memoline).Thepercentagechangeinmedian assetsbetween2007and2010isonlyabouthalf thepercentagechangeinmediannetworth reportedintable4,inpartforreasonsrelatedtohousing.Becausehousesarefrequently mortgaged,netequityinhomestendstobesmallerthantheassetvalueof thehomeitself; consequently,agivenchangeinhousingvalueswilltendtohaveanamplifiedproportional effectonnetworthchangesrelativetothechangeinvalueasaproportionof grossassets. Acrossnetworthgroups,thepercentagechangesinmedianassetsandnetworthweremost similarforfamiliesinthehighestorlowestquartilesof thedistributionof networth.For thewealthiergroups,housingtendstobeasmallershareof networth,anditislesslikelyto bemortgagesthanisthecaseforthemiddlewealthgroups.Fortheleastwealthygroup, homeownershipismuchlesscommonthanforothergroups.Thedivergencebetweenfluctuationsinmedianassetchangeandmediannetworthchangeislargestforthemiddletwo quartiles,whosenetworthtendstobedominatedbyhousing.Asimilareffectshowsup acrossincomegroups,asmiddle-incomefamiliesexperiencedsmallerdeclinesinmedian assetsthaninmediannetworth,inpartbecausetheyaremorelikelytobeleveragedhomeownerswhoseassetsaredominatedbyhousing.Acrossotherdemographicgroupssuchas age,raceorethnicity,andeducation,thepercentagedeclinesinmedianassetsaregenerally abouthalf thepercentagedeclineinmediannetworth.Notunexpectedly,suchdivergence of changesinwealthandassetswaslargestforhomeowners,whosemedianassetsfell 18.0percent,wellbelowtheirdeclineinmediannetworthof 29.1percent;forrenters,in contrast,medianassetsfell11.3percent,whichisgreaterthantheir5.6percentdeclinein mediannetworth. Financial Assets Althoughmedianandmeanfinancialassetsdeclinedfrom2007to2010,financialassetsas ashareof totalassetsrose3.9percentagepointsto37.9percent(table5,memoline);this movementreversesadeclineinthissharefromalevelin2001thatmarkedthehighpoint observedinthesurveysinceatleast1989.Theshareof financialassetsintotalassetshad fallen8.2percentagepointsbetween2001and2007.Therelativesharesof variousfinancial assetsalsoshifted.Thedeclineinthepercentageshareof directlyheldstockwasmostlyoffsetbyincreasesinthesharesof transactionandretirementaccounts.20Theshareof financialassetsheldinretirementaccountshasnearlydoubledsince1989,andasof 2010,it stoodat38.1percentof families’financialassets(datanotshowninthetables). Acrossthegroupsconsidered,the94.0percentrateof ownershipof anyfinancialassetin 2010wasalmostunchangedovertherecentthree-yearperiod(firsthalf of tables6.A and6.B,lastcolumn).Changesinownershiprateswerealsogenerallysmallacrossdemographicgroups,thoughthereareafewexceptions.Byage,familiesintheless-than-35 groupsawa2.1percentagepointincreaseintheirfinancialassetownershiprate,while thoseinthe55-to-64groupsawa2.0percentagepointdecline;byfamilystructure,owner- 20 Thedefinitionsofassetcategoriesintable5aregivenlaterinthearticle,inthesectionsoftextdevotedtothose categories.
52 FederalReserveBulletin|June2012 Table5.Valueoffinancialassetsofallfamilies,distributedbytypeofasset,2001–10surveys Percent Typeoffinancialasset 2001 2004 2007 2010 Transactionaccounts 11.4 13.1 10.9 13.3 Certificatesofdeposit 3.1 3.7 4.0 3.9 Savingsbonds .7 .5 .4 .3 Bonds 4.5 5.3 4.1 4.4 Stocks 21.5 17.5 17.8 14.0 Pooledinvestmentfunds(excludingmoney marketfunds) 12.1 14.6 15.8 15.0 Retirementaccounts 29.0 32.4 35.1 38.1 Cashvaluelifeinsurance 5.3 2.9 3.2 2.5 Othermanagedassets 10.5 7.9 6.5 6.2 Other 1.9 2.1 2.1 2.3 Total 100 100 100 100 MEMO Financialassetsasashareoftotalassets 42.2 35.8 34.0 37.9 Note:Forthisandfollowingtables,seetextfordefinitionofassetcategories.Alsoseenotetotable1. Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys A.2007SurveyofConsumerFinances Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Percentageoffamiliesholdingasset Allfamilies 92.1 16.1 14.9 1.6 17.9 11.4 53.0 23.0 5.8 9.3 93.9 Percentileofincome Lessthan20 74.9 9.4 3.6 * 5.5 3.4 10.8 12.8 2.7 6.6 79.1 20–39.9 90.1 12.7 8.4 * 7.8 4.6 35.8 16.4 4.7 8.7 93.2 40–59.9 96.3 15.5 15.2 * 14.0 7.1 55.6 21.6 5.4 10.2 97.2 60–79.9 99.3 19.3 20.9 1.4 23.2 14.6 74.3 29.4 5.7 8.4 99.7 80–89.9 100.0 19.9 26.2 1.8 30.5 18.9 86.9 30.6 7.6 9.7 100.0 90–100 100.0 27.7 26.1 8.9 47.5 35.5 89.6 38.9 13.6 15.3 100.0 Ageofhead(years) Lessthan35 87.3 6.7 13.7 * 13.7 5.3 42.1 11.4 * 10.0 89.2 35–44 91.2 9.0 16.8 .7 17.0 11.6 57.8 17.5 2.2 9.4 93.1 45–54 91.7 14.3 19.0 1.1 18.6 12.6 65.4 22.3 5.1 10.5 93.3 55–64 96.4 20.5 16.2 2.1 21.3 14.3 61.2 35.2 7.7 9.2 97.8 65–74 94.6 24.2 10.3 4.2 19.1 14.6 51.7 34.4 13.2 9.4 96.1 75ormore 95.3 37.0 7.9 3.5 20.2 13.2 30.0 27.6 14.0 5.3 97.4 Familystructure Singlewith child(ren) 81.1 9.0 10.9 * 7.1 6.8 35.0 21.4 2.4 11.5 84.6 Single,nochild, agelessthan55 87.4 9.9 9.4 * 18.0 8.9 46.7 10.2 2.0 11.6 90.0 Single,nochild, age55ormore 94.6 24.0 9.6 2.1 13.5 10.8 36.7 22.0 11.2 7.9 96.2 Couplewith child(ren) 94.3 12.5 24.0 1.2 18.9 12.0 62.1 23.6 4.4 8.6 95.1 Couple,nochild 95.7 22.5 11.6 2.9 24.1 14.4 62.6 30.2 8.1 8.7 97.3 Educationofhead Nohighschool diploma 75.7 9.5 3.4 * 3.9 2.2 21.6 12.6 1.7 7.1 79.7 Highschool diploma 90.9 14.1 11.5 .6 9.3 5.8 43.3 22.6 4.2 8.2 93.3 Somecollege 93.9 14.1 16.4 1.2 17.4 8.9 53.0 23.4 6.6 10.0 95.6 Collegedegree 98.7 21.6 21.6 3.3 31.5 21.4 73.9 27.2 8.5 10.8 98.9
ChangesinU.S.FamilyFinancesfrom2007to2010 53 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys—continued A.2007SurveyofConsumerFinances—continued Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Raceorethnicityofrespondent White non-Hispanic 95.5 19.4 17.8 2.1 21.4 13.7 58.5 25.3 7.3 9.7 96.8 Nonwhiteor Hispanic 83.9 8.2 7.8 .4 9.4 5.8 39.5 17.6 2.3 8.3 86.7 Currentworkstatusofhead Workingfor someoneelse 92.6 13.2 17.0 .9 17.8 10.4 62.7 20.3 3.7 9.2 94.2 Self-employed 96.9 15.0 15.9 4.2 24.3 21.4 55.4 32.1 6.9 14.8 98.0 Retired 91.6 25.7 10.2 2.3 16.4 11.3 34.2 27.3 11.2 7.0 93.7 Othernotworking 78.6 5.6 10.7 * 12.8 * 22.4 14.6 * 10.4 81.3 Currentoccupationofhead Managerialor professional 98.3 18.2 21.1 3.1 28.7 19.7 74.9 24.9 6.7 11.0 98.7 Technical,sales, orservices 91.9 11.5 15.0 .4 14.9 8.8 54.9 21.3 4.0 9.1 94.1 Otheroccupation 87.9 9.2 13.1 * 9.9 5.4 51.3 19.0 1.1 9.8 90.2 Retiredorother notworking 89.5 22.5 10.3 2.0 15.8 9.9 32.3 25.3 9.8 7.5 91.8 Region Northeast 91.3 18.1 18.9 2.0 21.4 15.5 53.7 23.5 6.4 5.4 92.5 Midwest 93.6 16.8 16.0 1.2 17.9 10.6 58.1 26.6 6.7 9.3 95.4 South 91.3 15.1 12.0 1.7 15.4 9.7 49.3 23.4 5.2 8.5 93.5 West 92.7 15.5 15.0 1.6 19.2 11.5 53.1 18.3 5.5 13.9 93.9 Urbanicity Metropolitan statisticalarea (MSA) 92.8 16.2 15.1 1.8 19.4 12.1 55.1 22.2 5.9 9.5 94.3 Non-MSA 88.7 15.9 13.8 .8 10.9 7.7 42.5 26.8 5.5 8.5 91.8 Housingstatus Owner 97.3 20.0 18.2 2.2 22.4 15.0 63.7 28.9 7.5 9.4 98.4 Renterorother 80.8 7.7 7.5 .4 8.1 3.5 29.6 10.1 2.1 9.1 84.0 Percentileofnetworth Lessthan25 76.3 2.5 4.8 * 4.3 * 19.7 7.8 * 7.4 79.6 25–49.9 93.6 9.9 12.3 * 10.2 3.6 48.6 19.7 1.9 8.9 96.4 50–74.9 98.6 19.4 17.6 * 17.2 10.4 63.1 28.5 6.2 8.6 99.5 75–89.9 100.0 32.5 25.9 * 31.7 22.8 77.5 32.3 11.1 9.4 100.0 90–100 100.0 32.9 23.2 11.7 52.4 42.2 84.8 41.7 20.6 16.6 100.0 shipincreased4.3percentagepointsforsinglefamilieswithchildrenbutdeclined2.7percentagepointsforchildlesssinglefamiliesheadedbysomeone55orolder;andbyworkstatus,ownershipfell1.6percentagepointsforfamiliesheadedbyapersonwhowasselfemployed.OwnershipincreasedfornonwhiteorHispanicfamiliesandforwhitenon- Hispanicfamilies.Theshareof homeownerswithfinancialassetsfell0.4percentagepoints, buttheownershiprateforrentersrose1.8percentagepoints. Althoughtheoverallratioof financialassetstototalassetsroseovertherecentperiod,that increaseisattributabletotherelativelylargerdeclinesinthevalueof nonfinancialassets; themedianholdingof financialassetsforfamilieshavingsuchassetsfell28.8percent,while themeanfell3.3percent.Therecentchangeinthemedianerasedthegainsexperiencedin thepreviousthree-yearperiod(2004to2007)andleftmedianfinancialassetsattheirlowest levelsincethe1995survey(datanotshowninthetables).Thedeclineinmedianfinancial assetholdingswaswidespreadacrossdemographicgroups,withgainsobservedforfamilies headedbysomeone75orolder,thetop10percentof familiesrankedbyincome,andthe top10percentof familiesrankedbynetworth.
54 FederalReserveBulletin|June2012 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys––continued A.2007SurveyofConsumerFinances––continued Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Medianvalueofholdingsforfamiliesholdingasset(thousandsof2010dollars) Allfamilies 4.2 21.0 1.0 83.8 17.8 58.7 47.1 8.4 73.3 6.3 30.2 Percentileofincome Lessthan20 .8 18.9 .5 * 4.0 31.4 6.3 2.6 104.8 1.6 1.8 20–39.9 1.7 18.9 1.0 * 10.5 31.4 12.6 5.2 90.1 3.1 7.3 40–59.9 2.9 17.8 .7 * 5.8 39.3 25.1 5.4 61.8 4.2 19.9 60–79.9 6.3 11.5 1.0 19.9 14.7 36.7 50.3 10.4 54.5 10.5 62.9 80–89.9 13.5 21.0 2.1 84.9 15.7 48.2 94.7 9.4 31.4 10.5 138.0 90–100 38.4 44.0 2.6 261.9 78.6 188.6 214.8 29.4 94.3 47.1 423.8 Ageofhead(years) Lessthan35 2.5 5.2 .7 * 3.1 18.9 10.0 2.9 * 1.6 7.1 35–44 3.6 5.2 1.0 10.2 15.7 23.6 38.8 8.7 25.1 8.4 27.2 45–54 5.2 15.7 1.0 209.5 19.4 52.4 66.0 10.5 47.1 6.3 56.9 55–64 5.4 24.1 2.0 95.1 25.1 117.3 104.8 10.5 61.8 21.0 77.2 65–74 8.1 24.4 1.0 52.4 39.8 90.1 80.7 10.5 73.3 10.5 71.3 75ormore 6.4 31.4 21.0 104.8 41.9 78.6 36.7 5.2 104.8 15.7 43.5 Familystructure Singlewith child(ren) 1.7 7.9 1.0 * 10.5 48.2 17.8 4.0 21.0 4.2 6.3 Single,nochild, agelessthan55 2.6 6.3 1.6 * 4.0 16.8 25.4 5.8 62.9 3.1 13.3 Single,nochild, age55ormore 2.9 29.3 4.2 52.4 26.2 80.7 48.8 5.2 104.8 3.8 28.3 Couplewith child(ren) 4.8 10.5 1.0 84.9 15.7 52.4 49.5 9.9 36.7 5.2 31.3 Couple,nochild 7.9 27.2 1.6 83.8 26.2 65.5 69.1 10.5 54.5 15.7 73.8 Educationofhead Nohighschool diploma 1.3 14.7 1.0 * 2.8 67.1 15.7 2.6 31.4 1.6 3.1 Highschool diploma 2.6 16.8 1.0 48.7 10.5 31.4 29.9 5.4 83.8 5.2 14.9 Somecollege 2.9 18.9 1.0 52.4 6.3 26.2 33.5 8.4 54.5 4.2 21.0 Collegedegree 10.5 26.2 1.2 104.8 26.2 78.6 78.6 13.6 78.6 10.5 101.0 Note:Seenotetotable1. *Tenorfewerobservations. Transaction Accounts and Certificates of Deposit In2010,92.5percentof familieshadsometypeof transactionaccount—acategorycomprisingchecking,savings,andmoneymarketdepositaccounts;moneymarketmutual funds;andcallorcashaccountsatbrokerages.Theincreaseof 0.4percentagepointinownershipsince2007continuedthegeneralupwardtrendseeninrecentsurveys;theownership rateisnow1.9percentagepointshigherthanin1998(datanotshowninthetables).Familiesthatdidnothaveanytypeof transactionaccountin2010weredisproportionatelylikely tohaveincomesinthelowestincomequintile,tobeheadedbyapersonyoungerthanage 35,tobenonwhiteorHispanic,tobeheadedbyapersonwhowasneitherworkingnor retired,toberenters,ortohavenetworthinthelowestquartile.Seebox4“Decisions aboutCheckingAccounts”foradiscussionof thereasonsfamiliesdoordonothavea checkingaccount.Overthe2007–10period,transactionaccountownershiprosenoticeably—between2.2and4.1percentagepoints—forsinglefamilieswithchildren,families headedbyapersonintheother-not-workingwork-statusgroup,andfamiliesinthebottom quartileof thenetworthdistribution.
ChangesinU.S.FamilyFinancesfrom2007to2010 55 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys––continued A.2007SurveyofConsumerFinances––continued Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Raceorethnicityofrespondent White non-Hispanic 5.3 21.0 1.0 100.4 19.9 67.1 55.5 9.4 73.3 10.1 47.2 Nonwhiteor Hispanic 2.1 10.5 1.0 24.2 8.4 31.4 26.2 5.2 31.4 3.1 9.4 Currentworkstatusofhead Workingfor someoneelse 4.0 10.5 1.0 49.1 11.0 44.0 42.1 7.9 28.5 5.2 30.2 Self-employed 10.4 26.2 1.0 157.2 62.9 83.8 95.3 25.1 83.8 16.8 56.7 Retired 4.2 31.4 2.6 83.3 30.1 81.9 52.4 5.8 104.8 10.5 31.3 Othernotworking 1.0 15.7 2.1 * 6.5 * 21.8 2.3 * 3.1 3.9 Currentoccupationofhead Managerialor professional 9.2 15.7 1.0 83.8 21.0 78.6 75.4 13.6 61.8 10.5 82.1 Technical,sales, orservices 3.1 15.7 1.0 129.1 12.6 41.9 31.4 9.4 10.5 5.2 18.4 Otheroccupation 2.6 10.5 .7 * 4.2 18.9 25.3 5.2 21.0 5.2 14.6 Retiredorother notworking 3.5 31.4 2.1 100.4 26.2 81.9 47.1 5.2 104.8 5.8 24.8 Region Northeast 5.3 21.0 1.0 120.1 18.7 52.4 60.1 9.4 76.5 10.5 46.4 Midwest 3.9 12.6 1.0 51.6 14.7 39.3 38.3 7.3 70.2 6.3 32.7 South 3.7 21.0 1.3 104.8 18.7 73.3 41.9 8.4 83.8 4.2 22.0 West 4.5 24.1 1.0 62.9 18.9 61.6 47.7 10.4 62.9 6.3 30.5 Urbanicity Metropolitan statisticalarea (MSA) 4.7 21.0 1.0 104.8 19.9 62.9 50.0 9.4 73.3 8.4 34.2 Non-MSA 2.6 10.5 1.3 52.4 11.5 35.6 35.3 5.2 47.1 2.5 16.8 Housingstatus Owner 6.5 21.0 1.0 104.8 21.0 62.9 59.7 10.4 73.3 10.5 57.7 Renterorother 1.3 10.5 .7 15.7 5.8 41.9 10.5 2.1 56.6 2.1 4.0 Percentileofnetworth Lessthan25 .7 2.1 .5 * 1.1 * 3.1 1.3 * 1.3 1.5 25–49.9 2.1 7.3 .7 * 3.1 9.4 15.7 3.1 14.5 3.1 14.0 50–74.9 6.3 15.7 1.3 * 6.3 26.2 52.4 6.8 52.4 10.5 63.6 75–89.9 16.2 26.2 2.1 * 21.0 52.4 125.7 15.7 83.8 21.0 226.6 90–100 48.7 52.4 3.7 173.8 131.0 276.6 333.2 31.4 165.5 52.4 809.9 MEMO Meanvalueof holdingsfor familiesholding asset 27.7 58.3 6.9 601.7 231.7 324.4 154.7 32.7 260.7 52.7 248.8 Theslightoverallexpansioninownershipof transactionaccountsintherecentthree-year periodisreflectedinthemostlyoffsettingchangesinthetypesof transactionaccountheld byfamilies.Ownershipof checkingandsavingsaccountsrose,whileownershipof money marketaccountsdeclinedandthatof callaccountswasbasicallyunchanged,asshownin table6.1:
56 FederalReserveBulletin|June2012 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys––continued B.2010SurveyofConsumerFinances Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Percentageoffamiliesholdingasset Allfamilies 92.5 12.2 12.0 1.6 15.1 8.7 50.4 19.7 5.7 8.0 94.0 Percentileofincome Lessthan20 76.2 5.7 3.6 .1 3.8 2.1 11.2 10.7 1.7 7.0 79.2 20–39.9 91.1 11.1 6.0 * 6.0 3.5 30.5 17.2 4.2 6.7 93.6 40–59.9 96.4 11.7 10.8 * 11.7 5.8 52.8 19.5 5.5 9.6 97.8 60–79.9 98.9 15.8 16.0 1.3 17.3 8.8 69.7 22.8 6.9 7.3 99.6 80–89.9 99.8 12.1 23.0 2.0 25.7 14.6 85.7 25.8 7.8 8.5 100.0 90–100 99.9 21.5 24.4 8.3 47.8 32.1 90.1 30.9 12.3 10.3 100.0 Ageofhead(years) Lessthan35 89.0 5.7 10.0 * 10.1 3.6 41.1 9.6 .9 9.0 91.3 35–44 90.6 5.7 11.6 .4 12.1 7.7 52.2 12.3 2.0 8.4 92.7 45–54 92.5 10.0 15.0 1.4 16.0 9.6 60.0 19.8 4.5 7.7 94.2 55–64 94.2 14.6 14.3 2.4 19.5 11.3 59.8 25.7 7.7 8.9 95.8 65–74 95.8 20.6 9.1 3.4 16.1 11.1 49.0 28.4 11.4 7.5 96.2 75ormore 96.4 27.2 10.1 3.6 20.1 11.9 32.8 32.4 14.1 5.0 96.4 Familystructure Singlewith child(ren) 84.9 6.7 6.3 * 6.9 3.0 34.0 11.1 3.3 8.3 88.9 Single,nochild, agelessthan55 88.3 6.0 6.3 * 10.7 5.0 40.2 9.8 1.5 11.3 90.6 Single,nochild, age55ormore 92.8 20.1 7.0 2.5 11.9 9.5 33.7 23.5 9.9 7.7 93.5 Couplewith child(ren) 94.3 10.4 18.9 1.2 17.0 9.1 60.1 18.9 3.9 7.6 95.7 Couple,nochild 95.9 15.8 12.4 2.9 20.9 12.4 61.6 27.9 8.8 6.7 96.6 Educationofhead Nohighschool diploma 77.4 6.0 2.7 * 2.2 * 17.1 11.9 3.1 5.3 80.8 Highschool diploma 90.0 10.8 9.1 .2 8.1 3.2 40.6 19.8 4.2 7.2 92.7 Somecollege 94.6 11.8 11.7 1.0 11.3 5.4 48.6 17.3 5.5 7.6 95.0 Collegedegree 98.4 15.6 17.7 3.6 27.2 17.6 70.5 23.3 7.9 9.8 98.9 Table6.1 Allfamilies Typeoftransactionaccount 2010 Change,2007–10 (percent) (percentagepoints) Checking 90.4 .7 Savings 50.5 3.4 Moneymarket 17.2 –3.7 Call 2.0 –.1 Thesavingsaccountcategoryincludesarelativelysmallnumberof tax-preferredaccounts suchasmedicalorhealthsavingsaccountsandCoverdellor529educationaccounts.21 Ownershipof anyof thesetypesof tax-preferredaccountsdecreasedfrom3.8percentin 2007to2.9percentin2010(datanotshowninthetables).Inbothof thetwoyears, 21 Coverdellsavingsaccounts,formerlyknownaseducationindividualretirementaccounts,and529savingplans aretax-preferredplansthatparentsorothersmayusetosaveforeducationalexpenses.
ChangesinU.S.FamilyFinancesfrom2007to2010 57 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys––continued B.2010SurveyofConsumerFinances—continued Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Raceorethnicityofrespondent White non-Hispanic 96.5 15.0 14.8 2.3 18.6 11.6 58.1 22.6 7.3 8.2 97.3 Nonwhiteor Hispanic 84.3 6.5 6.3 .2 7.9 2.6 34.4 13.7 2.3 7.6 87.2 Currentworkstatusofhead Workingfor someoneelse 93.6 9.0 13.7 1.0 13.8 8.1 59.6 17.1 3.6 7.7 95.2 Self-employed 94.8 15.7 12.9 3.5 24.5 14.9 54.7 25.9 8.3 11.1 96.4 Retired 91.7 20.1 9.6 2.6 15.4 8.9 34.4 25.5 10.4 7.3 92.9 Othernotworking 82.7 3.9 5.8 * 9.5 2.8 24.6 10.2 * 8.3 85.0 Currentoccupationofhead Managerialor professional 98.2 14.1 17.3 2.6 24.3 16.0 73.5 21.6 6.8 10.2 99.2 Technical,sales, orservices 91.7 7.4 11.0 .8 10.8 5.8 47.7 17.3 2.8 7.5 93.8 Otheroccupation 89.6 7.5 11.0 * 8.3 3.1 50.0 15.6 2.4 6.2 91.6 Retiredorother notworking 89.7 16.6 8.8 2.1 14.1 7.6 32.3 22.2 8.5 7.5 91.2 Region Northeast 91.2 12.4 16.9 2.0 16.5 11.7 54.4 20.6 6.1 7.1 93.0 Midwest 94.2 13.5 13.5 .8 13.8 7.2 54.6 23.3 6.1 7.3 95.5 South 91.1 11.4 9.8 1.5 13.1 7.2 45.9 19.3 5.1 7.2 92.9 West 94.2 12.0 10.1 2.3 18.7 10.4 50.5 16.1 6.0 10.8 95.4 Urbanicity Metropolitan statisticalarea (MSA) 92.8 12.1 12.7 1.8 16.6 9.6 52.2 19.3 6.0 8.1 94.2 Non-MSA 91.2 12.6 8.8 .8 7.9 4.5 41.9 21.9 3.9 7.5 93.1 Housingstatus Owner 97.4 15.6 15.0 2.3 19.6 11.4 61.7 24.0 7.6 7.6 98.0 Renterorother 82.4 5.2 5.8 .3 6.0 3.1 27.1 10.9 1.8 8.7 85.8 Percentileofnetworth Lessthan25 78.5 1.4 4.8 * 2.9 * 19.8 7.3 * 5.9 81.7 25–49.9 94.2 5.3 7.0 * 5.6 2.1 42.7 14.2 1.9 8.5 96.1 50–74.9 98.0 14.8 14.2 * 14.0 6.1 58.6 24.1 4.6 7.2 98.7 75–89.9 99.0 27.0 21.6 2.0 26.8 15.5 75.8 30.8 13.1 8.0 99.4 90–100 99.9 27.7 22.8 12.0 54.9 41.8 87.8 36.8 19.3 13.7 100.0 529plansaccountedforabout80percentof thenumberof thesetax-preferredsavings accounts,upfrom71percentin2004. Medianholdingsintransactionaccountsforthosewhohadsuchaccountsfell16.7percent from2007to2010,whilethemeanrose17.0percent.Thedeclineinmediantransaction accountbalanceswaswidelyobservedacrossdemographicgroups,buttherewerenoticeableexceptionsforchildlesssinglefamiliesheadedbysomeoneaged55orolder,families headedbyindividualswhoreportedtheircurrentworkstatusasretired,familiesinthe 75-or-olderagegroup,andfamiliesinthehighestdecileof thenetworthdistribution. Indeed,withinthehighestdecileof networth,mediantransactionbalancesrosefrom $48,700to$60,800,anincreaseof 24.8percent.Theincreaseinthealreadysubstantial holdingsof highlyliquidandsecuretransactionaccountbalancesamongthisgroupof wealthyfamiliesisakeytounderstandingtheriseintheoverallmeantransactionaccount balanceswhiletheoverallmedianfell. Certificatesof deposit—interest-bearingdepositswithasetterm—aretraditionallyviewed
58 FederalReserveBulletin|June2012 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys––continued B.2010SurveyofConsumerFinances––continued Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Medianvalueofholdingsforfamiliesholdingasset(thousandsof2010dollars) Allfamilies 3.5 20.0 1.0 137.0 20.0 80.0 44.0 7.3 70.0 5.0 21.5 Percentileofincome Lessthan20 .7 15.0 .5 20.0 20.0 38.0 8.0 3.1 38.0 2.3 1.1 20–39.9 1.5 15.0 .5 * 8.0 38.1 11.0 4.2 45.0 2.7 5.2 40–59.9 2.8 18.0 1.0 * 5.6 50.0 22.8 5.0 60.0 5.0 17.1 60–79.9 5.3 16.0 .7 30.0 13.0 50.0 37.0 7.5 33.0 7.0 39.5 80–89.9 11.1 29.0 .8 141.0 14.0 65.5 88.0 10.0 82.0 10.0 120.2 90–100 35.0 34.0 2.0 297.2 60.0 200.0 277.0 30.0 150.0 28.0 550.8 Ageofhead(years) Lessthan35 2.1 5.2 .5 * 5.4 8.5 10.5 2.1 9.0 2.0 5.5 35–44 2.5 7.0 .9 10.0 10.0 41.0 31.2 5.0 10.0 2.7 14.5 45–54 3.5 16.0 .8 150.0 30.0 110.0 60.0 10.0 50.0 7.0 33.7 55–64 5.0 20.0 1.2 250.0 35.0 110.0 100.0 9.3 65.0 11.0 55.8 65–74 5.7 25.0 4.0 100.0 48.0 115.0 100.0 10.0 95.0 15.0 45.2 75ormore 7.2 32.2 1.0 141.0 45.0 120.0 54.0 7.0 82.0 16.0 43.8 Familystructure Singlewith child(ren) 1.0 6.0 1.3 * 15.0 28.0 17.8 2.0 30.0 8.0 4.8 Single,nochild, agelessthan55 2.0 6.7 .5 * 7.9 21.0 20.5 5.0 15.0 2.0 7.9 Single,nochild, age55ormore 3.9 20.0 1.7 120.0 37.5 120.0 46.0 4.0 70.0 10.0 22.1 Couplewith child(ren) 3.8 14.0 .8 129.0 15.0 75.0 44.1 8.0 50.0 5.0 25.1 Couple,nochild 7.1 30.0 1.2 175.0 33.0 90.0 77.4 11.6 90.0 9.0 57.2 Educationofhead Nohighschool diploma .8 40.0 .5 * 2.7 * 16.3 4.5 50.0 1.3 1.6 Highschool diploma 2.0 20.0 .6 49.8 9.5 62.0 25.0 5.2 35.0 3.6 10.3 Somecollege 2.5 12.0 .8 40.0 9.9 35.0 27.0 6.0 60.0 5.0 14.1 Collegedegree 9.3 20.0 1.0 150.0 32.0 101.0 76.3 12.0 95.0 10.0 75.7 Note:Seenotetotable1. *Tenorfewerobservations. asalow-risksavingvehicle,andtheyareoftenusedbypersonswhodesireasafehaven fromthevolatilityof financialmarkets.Overthe2007–10period,theattractivenessof CDs wassubjectedtocompetingforces,twoof whichseemparticularlypowerful.Increased volatilityinstockandbondmarketsmadeCDsmoreattractiverelativetothoseinvestmentsasahavenfromrisk,buttheconvergenceof yieldsonallrelativelysafeassetsata levelnearzeroimpliedthattheadvantageCDstypicallyholdovertransactionaccounts wasgreatlyreduced.Thenetresultof theseandotherfactorsisthatCDownershipfell 3.9percentagepointsbetween2007and2010,andthemedianbalanceheldinCDsamong thoseowningthemfell4.8percent;atthesametime,themeanholdingsrose24.5percent. Thedeclineinownershiprateswaswidespread,withtheself-employedbeingtheonly demographicgrouptoshowanincreaseintheownershiprate.However,thegrowthin medianbalancesacrossdemographicgroupswasmorediverse;notableincreasesinmedian balanceswereobservedforthehighestdecileof thenetworthdistribution,familiesinthe Midwestregion,familiesheadedbyapersonwhowasself-employed,familieswithincomes betweenthe40thand90thpercentilesof theincomedistribution,andfamiliesheadedbya personwhodidnothaveanycollegeeducation.
ChangesinU.S.FamilyFinancesfrom2007to2010 59 Table6.Familyholdingsoffinancialassets,byselectedcharacteristicsoffamiliesandtypeofasset, 2007and2010surveys––continued B.2010SurveyofConsumerFinances––continued Pooled Trans- Certifi- Retire- Cash Other Any Family Savings investaction catesof Bonds Stocks ment valuelife managed Other financial characteristic bonds ment accounts deposit accounts insurance assets asset funds Raceorethnicityofrespondent White non-Hispanic 5.0 20.0 1.0 142.0 25.0 91.0 54.0 8.0 73.0 7.5 37.1 Nonwhiteor Hispanic 1.6 13.0 1.0 5.0 10.0 50.0 25.0 5.0 25.0 3.0 6.0 Currentworkstatusofhead Workingfor someoneelse 3.3 10.0 .6 100.0 12.5 50.0 35.6 6.0 31.7 3.0 20.9 Self-employed 7.5 30.0 1.3 257.4 50.0 103.6 85.0 19.0 89.0 10.0 50.5 Retired 4.5 30.0 2.0 140.0 35.0 120.0 66.7 7.3 75.0 10.0 29.1 Othernotworking 1.0 10.0 1.0 * 11.0 120.0 19.3 5.0 * 3.5 2.8 Currentoccupationofhead Managerialor professional 8.5 15.0 1.0 170.0 30.0 100.0 73.1 10.0 84.0 9.0 64.5 Technical,sales, orservices 2.1 12.0 1.0 36.4 10.0 54.9 25.0 5.0 25.0 2.5 10.6 Otheroccupation 2.2 10.0 .5 * 5.6 9.0 25.3 6.0 17.8 2.8 11.7 Retiredorother notworking 3.0 29.0 1.5 141.0 30.0 120.0 56.5 7.0 73.0 7.0 15.9 Region Northeast 4.5 15.0 1.0 104.0 25.0 110.0 60.0 10.0 38.0 6.5 33.4 Midwest 3.4 17.0 .5 300.0 11.0 52.0 40.0 5.6 80.0 3.0 23.5 South 3.0 20.0 1.0 200.0 20.0 87.5 37.2 7.0 85.0 5.0 16.6 West 4.0 20.0 1.0 100.0 30.0 75.0 45.0 9.0 40.0 8.0 20.3 Urbanicity Metropolitan statisticalarea (MSA) 3.9 19.0 1.0 142.6 23.4 91.0 49.6 8.0 70.0 5.0 23.9 Non-MSA 2.5 20.0 .5 53.1 10.0 40.0 28.8 5.0 70.0 4.0 13.3 Housingstatus Owner 5.8 20.0 1.0 129.0 26.5 100.0 59.3 8.5 75.0 8.0 45.8 Renterorother 1.0 10.0 .6 164.0 5.6 20.0 10.0 4.0 16.0 3.0 3.0 Percentileofnetworth Lessthan25 .6 1.5 .2 * 1.0 * 5.0 1.5 * 1.0 1.1 25–49.9 1.7 5.5 .5 * 2.5 5.0 12.0 3.1 10.0 3.0 7.8 50–74.9 5.2 15.0 .6 * 7.0 20.5 42.0 5.8 30.0 5.0 45.2 75–89.9 14.5 25.0 1.4 50.0 25.0 60.0 133.0 13.7 70.0 10.0 201.0 90–100 60.8 65.0 3.0 220.0 110.0 245.0 413.0 30.0 150.0 70.0 888.0 MEMO Meanvalueof holdingsfor familiesholding asset 32.4 72.6 6.1 615.0 209.7 388.6 171.2 28.4 247.9 63.9 240.6 Savings Bonds and Other Bonds Savingsbondsareowneddisproportionatelybyfamiliesinthehighest40percentof the incomedistributionandbyfamiliesinthetophalf of thedistributionof networth.Over the2007–10period,theownershipof savingsbondsdeclined2.9percentagepointsto 12.0percentoverall,anditfellforvirtuallyalldemographicgroups.Thedropinownership between2007and2010continuedageneraldownwardtrendobservedintheSCFforsome time;in1998,19.3percentof familiesownedsavingsbonds(datanotshowninthetables). Medianholdingswereunchangedovertherecentthree-yearperiod,butthemeanfell 11.6percent.
60 FederalReserveBulletin|June2012 Box 4. Decisions about Checking Accounts Between2007and2010,theproportionoffamilieswithanytypeoftransactionaccount edgedup(table6inthemaintext),whilethesharewithoutacheckingaccountfell0.7percentagepoint,from10.3percentto9.6percent(datanotshowninthetables).Thedecline inthefractionoffamilieswithoutacheckingaccountfollowsalongertrend;in1989,the sharewas18.7percent.1 Amongfamilieswithoutacheckingaccountin2010,55.5percenthadheldsuchan accountinthepast,59.1percenthadincomesinthelowestquintileofthatdistribution, 50.9percentwereheadedbyapersonyoungerthanage45,and66.0percentwerenonwhiteorHispanic.TheSurveyofConsumerFinances(SCF)askedallfamiliesthatdidnot haveacheckingaccounttogiveareasonfornothavinganaccount(tableA).Themost commonlyreportedreason—givenby27.8percentofsuchfamilies—wasthatthefamily didnotlikedealingwithbanks;thepercentagecitingthisreasonhasrisensteadilysince 1989.Another20.3percentdidnotwriteenoughcheckstomakeaccountownership worthwhile;thisreasonhadbeenthemostfrequentlyreportedoneineachoftheyears before2007.Another10.6percentoffamiliessaidthatservicechargesweretoohigh.The SCFshowedadecreaseinthefractionoffamiliesreportingcreditproblemsasareason—from6.6percentin2007to4.2percentin2010;thisreasonhadrisensubstantially through2007frompreviousyears. TableA.Distributionofreasonscitedbyrespondentsfortheirfamilies'nothavingachecking account,byreason,2001–10surveys Percent Reason 2001 2004 2007 2010 Donotwriteenoughcheckstomakeitworthwhile 28.5 27.9 18.7 20.3 Minimumbalanceistoohigh 6.5 5.6 7.6 7.4 Donotlikedealingwithbanks 22.6 22.6 25.2 27.8 Servicechargesaretoohigh 10.2 11.6 12.3 10.6 Cannotmanageorbalanceacheckingaccount 6.6 6.8 3.9 4.7 Donothaveenoughmoney 14.0 14.4 10.4 10.3 Creditproblems 3.6 * 6.6 4.2 Donotneed/wantanaccount 5.1 5.2 8.9 7.3 Other 2.8 3.5 6.4 7.4 Total 100 100 100 100 *Tenorfewerobservationsinanyofthetypesofincome. Whenattentionisfurtherrestrictedtofamiliesthatoncehadacheckingaccount(datanot showninthetables),thegeneralpatternofresponsesissimilartothatforallfamilieswithoutacheckingaccount,butsomedifferencesareevident.Forfamiliesthatoncehada checkingaccount,theproportionreportingtheydonothaveenoughmoney,donotwrite enoughchecks,ordonotneedorwantanaccountrosein2010.Theseincreaseswereoffsetbydecreasesintheproportionreportingtheyhavecreditproblems,dislikedealingwith banks,orcannotmanageorbalanceacheckingaccount. TheSCFaskedallfamilieswithacheckingaccounttogivethemostimportantreasonthey chosethefinancialinstitutionfortheirmaincheckingaccount(tableB).In2010,46.0percentoffamilieschosetheinstitutionfortheirmaincheckingaccountforreasonsrelatedto thelocationoftheofficesoftheinstitution.2Another16.6percentplacedthemostimportanceontheabilitytoobtainmanyservicesatoneplace,and14.2percentsingledoutthe importanceofobtainingthelowestfeesorminimumbalancerequirements.Absenceofrisk wasofprimaryimportanceforonlyarelativelysmallfractionoffamilies.Overthe2007–10 period,themostnoticeablechangesintheseresponsesweredecreasesinthefractionof familiescitingreasonsrelatedtoapersonalrelationshipwiththebankoraconnection throughworkorschool.Overall,thefractionsoffamiliesreportingeachreasonchanged littlefrom2007. continuedonnextpage
ChangesinU.S.FamilyFinancesfrom2007to2010 61 Box 4—continued TableB.Distributionofreasonscitedbyrespondentsasthemostimportantreasonforchoosing institutionfortheirmaincheckingaccount,2001–10surveys Percent Reason 2001 2004 2007 2010 Locationoftheiroffices 42.8 45.4 45.9 46.0 Hadthelowestfees/minimumbalancerequirement 16.6 16.3 13.7 14.2 Abletoobtainmanyservicesatoneplace 16.4 15.3 16.2 16.6 Recommended;friend/familyhasaccountthere 4.7 3.9 4.2 4.0 Personalrelationship;theyknowme;familymemberworks there 4.0 3.5 4.2 3.3 Connectionthroughworkorschool 2.0 3.5 3.3 2.1 Alwaysdonebusinessthere;bankedtherealongtime;other businessthere 2.4 2.9 3.0 2.4 Offeredsafetyandabsenceofrisk 2.2 1.9 2.9 3.6 Otherconvenience;payrolldeduction/directdeposit 1.3 1.2 .5 .7 Other 7.5 6.1 6.1 7.1 Total 100 100 100 100 1 Forthedefinitionof“transactionaccount,”seethemaintext.Foramoreextensivediscussionofthewaysthat familiesobtaincheckingandcreditservices,seeJeanneM.Hogarth,ChristoslavE.Anguelov,andJinhookLee (2005),“WhoHasaBankAccount?ExploringChangesoverTime,1989–2001,”JournalofFamilyandEconomic Issues,vol.26(Spring),pp.7–30. 2 Foradiscussionofthedefinitionoflocalbankingmarkets,seeDeanF.Amel,ArthurB.Kennickell,andKevinB. Moore(2008),“BankingMarketDefinition:EvidencefromtheSurveyofConsumerFinances,”Financeand EconomicsDiscussionSeries2008-35(Washington:BoardofGovernorsoftheFederalReserveSystem,August; paperdatedJuly7),www.federalreserve.gov/pubs/feds/2008/200835/200835pap.pdf. Otherbondtypestendtobeverynarrowlyheld,andtheownershipratewasunchanged from2007at1.6percentin2010.22Asshowninthefollowingtable,theproportionof familiesthatownedtax-exemptbondsorcorporateorforeignbondsincreasedslightlyinthe recentperiod,whileownershipof othertypesof bondsdeclinedslightly: Table6.2 Allfamilies Typeofbond 2010 Change,2007–10 (percent) (percentagepoints) Government .3 –.1 Taxexempt 1.2 .2 Mortgagebacked .2 –.1 Corporateorforeign .5 .1 Ownershipof anytypeof bondotherthansavingsbondsisconcentratedamongthehighesttiersof theincomeandwealthdistributions,andthesegroupssawlittlechangein ownershipfrom2007to2010.Themedianvalueof holdingsof suchbondsforfamilies thathadthemrose63.5percentoverthisperiod,whilethemeanrose2.2percent. 22 “Otherbonds”asreportedinthesurveyarehelddirectlyandincludecorporateandmortgage-backedbonds; federal,state,andlocalgovernmentbonds;andforeignbonds.Inthisarticle,financialassetsheldindirectlyare thoseheldintax-preferredretirementaccountsormanagedaccountssuchastrustsorannuities.
62 FederalReserveBulletin|June2012 Publicly Traded Stock Thedirectownershipof publiclytradedstocksismorewidespreadthanthedirectownershipof bonds,but,aswithbonds,itisalsoconcentratedamonghigh-incomeandhighwealthfamilies.Theoverallshareof familieswithanysuchstockholdingsdeclined2.8percentagepointsfrom2007to2010,to15.1percent,therebycontinuingadecreaseobserved sincedirectstockownershippeakedinthe2001SCFat21.3percent(datanotshowninthe tables).Acrossdemographicgroups,declinesinownershipweremorecommonthan increases,withthenoticeableexceptionof familiesinthetopdecileof networth,forwhom ownershiprose2.5percentagepoints.Ownershipalsoroseslightlyforfamiliesinthetop decileof income(by0.3percentagepoint)andforfamiliesheadedbyapersonwhowas self-employed(by0.2percentagepoint). Althoughthemajorstockpriceindexesdecreasedabout25percentoverthe2007–10 period,themedianamountof directlyheldstockforfamilieswithsuchassetsrose 12.4percent,andthemeanfellonly9.5percent.Theseemingcontradictionbetweenthe movementintheindexesandthemovementinthemedianandmeanmaybeexplained,in part,bytheexitof holdersof smalleramountsof stocks. Thewidevariationinchangesobservedacrossdemographicgroupsreflectschangesin ownershipratesaswellaschangesinthecompositionof someof thedemographicgroups notedearlier.Onenoticeablesuchinstanceisthegroupof familiesincludedinthelowest 20percentof theincomedistributionineachyear.Thedirectstockownershiprateforthis groupfellfrom5.5percentin2007to3.8percentin2010,whilemedianholdingsfordirect stockownerswithinthegrouprosefrom$4,000in2007to$20,000in2010,alevelthat exceededthatforallbutthehighestincomequintilegroup.Animportantpartof the changeinthemedianforthelowestincomegroupmaybeexplainedbyachangeinthe compositionof thegrouptoincludealarger-than-usualfractionof familieswithrelatively highnetworth. Thegreatmajorityof familieswithdirectlyheldstockownedstockinonlyasmallnumber of companies.Asshowninthefollowingtable,overthethree-yearperiod,thereweresigns of increaseddiversificationastheshareof familiesowningstockinonlyonecompany decreased: Table6.3 Familieswithdirectly-heldstocks Numberof directly-heldstocks 2010 Change,2007–10 (percent) (percentagepoints) 1 29.2 –7.2 2to9 53.0 5.4 10ormore 17.8 1.8 For35.5percentof stockownersin2010,atleastoneof thecompaniesinwhichthey ownedstockwasonethatemployed,orhademployed,thefamilyheadorthatperson’s spouseorpartner(datanotshowninthetables).Directownershipof stockinaforeigncompanywaslesscommon;only15.3percentof stockholdershadthistypeof stock.
ChangesinU.S.FamilyFinancesfrom2007to2010 63 Pooled Investment Funds Directlyheldpooledinvestmentfundsareamongtheleastcommonlyheldof thetypesof financialassetsshownintable6.23Aswasthecasefordirectlyheldstocks,from2007to 2010,directownershipof pooledinvestmentfundsfell—adeclineof 2.7percentagepoints, to8.7percentof familiesin2010.Ownershipof pooledinvestmentfundsdroppedfor almosteverydemographicgroupoverthethree-yearperiod,thoughthedecreasewasvery slightforthetopdecileof thenetworthdistribution.Theownershipdeclinesatboththe overalllevelandthelevelof thedemographicgroupscontinueapatternobservedsince 2001,whenoverallownershipof pooledinvestmentfundswasat17.7percent(datanot showninthetables). Thesurveyalsocollectsinformationonthedifferenttypesof pooledinvestmentfunds ownedbyfamilies.Ownershipshiftedovertherecentperiodawayfromstockfundsand toward“otherbond”funds(largelycorporatebonds);theresidual“other”category,which consistsalmostentirelyof hedgefundsandexchange-tradedfunds,alsoincreased,as showninthefollowingtable: Table6.4 Allfamilies Typeofpooled investmentfund 2010 Change,2007–10 (percent) (percentagepoints) Stock 7.7 –2.6 Tax-freebond 1.9 –.1 Governmentbond 1.0 –.2 Otherbond 1.4 .4 Combination 1.4 .1 Other .9 .4 Amongfamiliesowningpooledinvestmentfunds,thevalueof holdingshascontinuedan increaseseenovertheprecedingdecade;intherecentthree-yearperiod,themedianholding rose36.3percent,andthemeanrose19.8percent.Medianandmeanvaluesincreased acrossalmosteverydemographicgroup,evidencethatthedecreaseinownershipmayhave beenconcentratedamongfamilieswithrelativelysmallaccountbalances(datanotshown inthetables). Retirement Accounts Ownershipof tax-deferredretirementassetssuchaspersonallyestablishedindividualretirementaccounts(IRAs)orjob-based401(k)accountstendstoincreasewithfamilies’income andnetworth.24Forseveralreasons,ownershipisalsomorelikelyamongfamiliesheaded byapersonlessthan65yearsof agethanamongtheoldergroups.First,eventhough 23 Inthisarticle,pooledinvestmentfundsexcludemoneymarketmutualfundsandindirectlyheldmutualfunds andincludeallothertypesofdirectlyheldpooledinvestmentfunds,suchastraditionalopen-endand closed-endmutualfunds,realestateinvestmenttrusts,andhedgefunds. 24 Tax-deferredretirementaccountsconsistofIRAs,Keoghaccounts,andcertainemployer-sponsoredaccounts. Employer-sponsoredaccountsconsistof401(k),403(b),andthriftsavingsaccountsfromcurrentorpastjobs; othercurrentjobplansfromwhichloansorwithdrawalscanbemade;andaccountsfrompastjobsfromwhich thefamilyexpectstoreceivetheaccountbalanceinthefuture.Thisdefinitionofemployer-sponsoredplansis intendedtoconfinetheanalysistoaccountsthatareportableacrossjobsandforwhichfamilieswillultimately havetheoptiontowithdrawthebalance. Usually,suchaccountsmaybeinvestedinvirtuallyanyasset,includingstocks,bonds,pooledinvestmentfunds, options,andrealestate.Inprinciple,employer-sponsoredplansmaybeinvestedinasimilarlybroadway,but, inpractice,aperson’schoicesforinvestmentaresometimeslimitedtoanarrowersetofassets.
64 FederalReserveBulletin|June2012 retirementaccountshavebeenincreasinglyprevalentinthepast30years,theymaynot havebecomeavailableuntilrelativelylateinthecareersof manypersonsintheolder groups.Second,beginningintheyearthatapersonreachesage59½,fundsheldbythat personinretirementaccountsmaybewithdrawnwithoutpenalty,andsomeinthetwooldestagegroupsmayhavealreadydoneso.Third,familiesmayhaveusedfundsfromretirementaccountsaccumulatedfrompreviousemploymenttopurchaseanannuityatretirement;annuitiesaretreatedintheSCFasaseparatetypeof managedasset. From2007to2010,thefractionof familieswithretirementaccountsfell2.6percentage pointsto50.4percent;thedecreaseoffsetmostof the3.1percentagepointincreaseover theprecedingthreeyears.Theoverallrateof retirementaccountownershiphasvaried around50percentforaboutthepastdecade.Intherecentthree-yearperiod,thefractionof familiesthathadsometypeof accountplanassociatedwithacurrentorpastjoborthat heldanIRAorKeoghaccountdecreased,andthefractionthathadatleastoneaccountof eachtypedeclinedaswell,asshowninthefollowingtable: Table6.5 Allfamilies Typeofretirementaccount 2010 Change,2007–10 (percent) (percentagepoints) Accountplanfromcurrentorpastjob 35.1 –2.9 IndividualretirementaccountorKeogh 28.1 –2.5 MEMO Bothtypes 12.6 –2.1 Overthe2007–10period,ownershipof retirementaccountsdecreasedfornearlyallof the groupsconsideredhere.Themostnoticeabledeclinesinownershipwereamongfamiliesin themiddle-income,middle-wealth,andmiddle-agegroups;forthosegroups,retirement accountshadbeengrowinginimportanceasasupplementtoSocialSecurityandother typesof retirementincome,andthedecreaseinownershipinthepastthreeyearsmayrepresentasetbackinretirementpreparedness.Acrossemploymentandoccupationcategories, thelargestchangeswerethe3.1percentagepointdropinretirementaccountownership amongfamilieswhoseheadwasworkingforsomeoneelseandthe7.2percentagepoint dropforthetechnical,sales,orservicesoccupationgroup. Inareversalof atrendovertheprecedingdecade,medianholdingsinretirementaccounts decreasedinthe2007–10period;forfamilieshavingsuchaccounts,themedianfell6.6percent.Meanbalancescontinuedtogrow,however,atarateof 10.7percentoverthethreeyearperiod.Thepatternsof changesinmedianaccountbalancesacrossdemographic groupsweremixed,butaswithownershiprates,familiesinthemiddle-income,middlewealth,andmiddle-agegroupssawdecreasesinmedianaccountbalances,whileretirees andthosewithhigherincomesandhighernetworthsawnoticeableincreases.25 Althoughtax-deferredretirementassetsareclearlyanimportantelementinretirement planning,familiesmayholdavarietyof otherassetsthatareintended,atleastinpart,to financeretirement.Suchotherassetsmightalsobeusedforcontingenciesasnecessary. 25 Inaddition,the2009panelinterviewwiththe2007SCFrespondentsindicatedthatsomefamiliesintheage rangeforwhichapenaltyisassessedforwithdrawalsfromsuchaccountshadclosedtheirretirementaccounts duringthetwo-yearperiod.Ofthe55.8percentoffamiliesheadedbysomeoneyoungerthanage58thatowned retirementaccountsin2007,10.8percentofthegroupreportednothavingsuchanaccountin2009(datanot showninthetables).
ChangesinU.S.FamilyFinancesfrom2007to2010 65 Similarly,aneedforliquiditymightdriveafamilytoliquidateorborrowagainstatax-deferredretirementasset,evenif itwillbeassessedapenaltyfordoingso. Twocommonandoftenparticularlyimportanttypesof retirementplansarenotincluded intheassetsdescribedinthissection:SocialSecurity(thefederallyfundedOld-Ageand Survivors’Insuranceprogram(OASI))andemployer-sponsoreddefined-benefitplans. OASIiswelldescribedelsewhere,anditcoversthegreatmajorityof thepopulation.26The retirementincomeprovidedbydefined-benefitplansistypicallybasedonworkers’salaries andyearsof workwithanemployer,agroupof employers,oraunion.Unfortunately, futureincomestreamsfromOASIanddefined-benefitplanscannotbetranslateddirectly intoacurrentvaluebecausevaluationdependscriticallyonassumptionsaboutfuture eventsandconditions—workdecisions,earnings,inflationrates,discountrates,mortality, andsoon—andnowidelyagreed-uponstandardsexistformakingtheseassumptions.27 However,theSCFdoescontainsubstantialinformationforfamilyheadsandtheirspouse orpartnerregardinganydefined-benefitplansorothertypesof planswithsomekindof accountfeaturetowhichtheyhaverightsfromacurrentorpastjob.28In2010,55.1percent of familieshadrightstosometypeof planotherthanOASIthroughthecurrentorpast workof eitherthefamilyheadorthatperson’sspouseorpartner,belowthe57.7percent levelin2007.Forthisgroupof families,thefractionwithastandarddefined-benefitplan withanannuitypayoutschemeincreasedslightlyovertherecentperiod,whilethefraction withaplanwithatleastsomeaccountfeatureandthefractionthathadbothtypesof plans decreased,asshowninthefollowingtable: Table6.6 Familieswithanypensionplan Typeofpensionplan 2010 Change,2007–10 (percent) (percentagepoints) Definedbenefit 56.4 .6 Accountplan 63.6 –2.2 MEMO Bothtypes 20.0 –1.6 Inmanypensionplanswithaccountfeatures,contributionsmaybemadebytheemployer, theworker,orboth.Insomecases,thesecontributionsrepresentasubstantialamountof saving,thoughworkersmayoffsetthissavingbyreducingtheirsavinginotherforms.An employer’scontributionsalsorepresentadditionalincomefortheworker.In2010,85.4percentof familieswithanaccountplanonacurrentjobof eitherthefamilyheadorthatperson’sspouseorpartnerhadanemployerthatmadecontributionstotheplan,adeclineof 1.8percentagepointsfrom2007.In2010,91.9percentof familieswithsuchplansmade contributionsthemselves,anincreaseof 0.5percentagepointfrom2007.Themedian annualcontributionbyemployerswhocontributedtosuchaccountswas$2,300in2010, 26 ForadetaileddescriptionofOASI,seeSocialSecurityAdministration,“OnlineSocialSecurityHandbook: YourBasicGuidetotheSocialSecurityPrograms,”Publication65-008,www.ssa.gov/OP_Home/handbook/ssahbk.htm. 27 Foronepossiblecalculationofnetworththatincludestheannuityvalueofpaymentsfromdefined-benefitpensionsandOASI,seeArthurB.KennickellandAnnikaE.Sundén(1997),“Pensions,SocialSecurity,andthe DistributionofWealth,”FinanceandEconomicsDiscussionSeries1997-55(Washington:BoardofGovernors oftheFederalReserveSystem,October),www.federalreserve.gov/pubs/feds/1997/index.html. 28 Thedefinitionofaccountplanusedherediffersslightlyfromthatusedincomputingthesurveywealthmeasure,whichincludesaccountbalancesonlyifthefamilyhastheabilitytomakewithdrawalsfrom,orborrow against,theaccount.Heretheonlycriterionusedinclassificationiswhetheranyaccountbalanceexists.For example,adefined-benefitplanwithaportablecashoption,whichwouldallowthecoveredworkertoreceivea lumpsuminlieuofregularpaymentsinretirement,wouldbetreatedasanaccountplanhere.
66 FederalReserveBulletin|June2012 andthemediancontributionbyfamilieswhocontributedwas$3,000;bothamountswere littlechangedfrom2007levels(datanotshowninthetables). Theeligibilityof workingheadsof familiestoparticipateinanytypeof job-relatedpensionfellfrom55.9percentin2007to52.9percentin2010;ithadrisen1.1percentagepoints overtheprecedingthreeyears(datanotshowninthetables).Participationbyeligible workersisusuallyvoluntary.In2010,84.3percentof familyheadswhowereeligibletoparticipateelectedtodoso,upslightlyfrom83.8percentin2007.29Thechoicetoparticipate appearstoberelatedstronglytoincome.In2010,thefractionof eligiblefamilyheads decliningtoparticipatewasprogressivelylowerathigherincomelevels,andthisgeneral patternwasnotsubstantiallyalteredfrom2007,asshownbythefollowingtable: Table6.7 Familiesheadedbyapersonwhowaseligibleforawork-relatedretirementplan onacurrentjobandwhodeclinedtoparticipate Percentileofincome 2010 Change,2007–10 (percent) (percentagepoints) Lessthan20 54.6 .3 20–39.9 26.8 –1.3 40–59.9 17.0 –1.5 60–79.9 14.3 3.8 80–89.9 7.7 –3.2 90–100 5.5 –1.0 Cash Value Life Insurance Cashvaluelifeinsurancecombinesaninvestmentvehiclewithinsurancecoverageinthe formof adeathbenefit.30Somecashvaluelifeinsurancepoliciesofferahighdegreeof choiceinthewaythepolicypaymentsareinvested.Investmentreturnsonsuchpoliciesare typicallyshieldedfromtaxationuntilthemoneyiswithdrawn;if thefundsremain untappeduntilthepolicyholderdies,thebeneficiaryof thepolicymayreceive,tax-free,the deathbenefit.Incontrast,terminsurance,theotherpopulartypeof lifeinsurance,offers onlyadeathbenefit.Oneattractionof cashvaluepoliciesforsomepeopleisthattheypromoteregularsavingfundedthroughtherequiredpolicypremium. Ownershipof cashvaluelifeinsuranceisbroadlyspreadacrossdemographicgroups,witha tendencytowardincreasingratesamongfamilieswithhigherlevelsof incomeandnet worthandthosewitholderfamilyheads.Thechangeinownershipof cashvaluepolicies overthe2007–10periodcontinuedadecliningtrend,decreasing3.3percentagepoints,to 19.7percentof familiesin2010.Thedeclinewassharedbyvirtuallyalldemographic groups;theonlygroupwithanoticeableincreaseinownershipisfamiliesheadedbysomeoneaged75orolder.Overthethree-yearperiod,ownershipof anytypeof lifeinsurance, cashvalueorterm,alsofell—from64.9percentin2007to62.6percentin2010(datanot showninthetables).Of thosefamilieswithsometypeof lifeinsurance,theproportion 29 AnanalysisoftheMarchCurrentPopulationSurvey(CPS)withadefinitionoffamilyheadthatisclosestto thatinthisarticledoesnotshowthesamemagnitudeofdeclineinpensioneligibilityforemployedfamily heads,butthelevelsaregenerallysimilartothoseseenintheSCF.TheCPSeligibilityestimateforfamilyheads withajobinthepastyearwas53.9percentin2007and53.5percentin2010.Differencesinthedefinitionof employmentmayexplainsomeofthedifferencebetweenthetwosurveys.LiketheSCF,theCPSshowsasmall increaseintheuptakerateforeligibleworkers—from83.3percentin2007to83.6percentin2010. 30 Thesurveymeasuresthevalueofsuchpoliciesaccordingtotheircurrentcashvalue,nottheirdeathbenefit. Thecashvalueisincludedasanassetinthisarticleonlywhenthecashvalueatthetimeoftheinterviewwas nonzero.
ChangesinU.S.FamilyFinancesfrom2007to2010 67 withtermpolicieswasaboutunchanged,whiletheproportionwithcashvaluepoliciesfell; thesechangesaresimilartotrendsobservedintheearliersurveys. Afterrisingoverthepreviousthree-yearperiod,themedianvalueof cashvaluelifeinsuranceforfamiliesthathadanysuchinsurancefell13.1percentbetween2007and2010,and themeanfell13.1percent.Themedianshowedamixof increasesanddecreasesacross demographicgroups,althoughitdeclinedconsiderablyforyoungerfamilies,singlefamilies withchildren,familiesheadedbyapersonwhowasself-employedorworkingforsomeone else,andfamiliesheadedbysomeoneworkinginatechnical,sales,orserviceoccupation. Other Managed Assets Ownershipof othermanagedassets—personalannuitiesandtrustswithanequityinterest andmanagedinvestmentaccounts—isconcentratedamongfamilieswithhigherlevelsof incomeandwealthandamongfamiliesheadedbyapersonwhoisaged55orolderorwho isretired.31Ownershipof theseassetswaslittlechangedbetween2007and2010,following amoresubstantialdecreaseoverthepreviousthreeyears.Changesinownershiprates acrossdemographicgroupsweremixedintherecentthree-yearperiod,withthevastmajorityof 2010valueswithin2percentagepointsof thecorresponding2007values.Acrossall families,thefractionwithanannuitywasnearlyunchangedovertheperiod,andthefractionwithatrustormanagedinvestmentaccountedgeddown,asshowninthefollowing table: Table6.8 Allfamilies Typeofothermanagedasset 2010 Change,2007–10 (percent) (percentagepoints) Annuity 4.5 .1 Trustormanagedinvestmentaccount 1.3 –.3 MEMO Bothtypes .2 –.1 Between2007and2010,themedianvalueof othermanagedassetsforfamiliesthathad suchassetsdecreased4.5percent,offsettingsomeof thesubstantialincreaseintheprecedingthree-yearperiod.Overthemorerecentperiod,thecorrespondingmeanvaluefell 4.9percent.Changesinmedianholdingsvariedgreatlyacrossdemographicgroups—for example,increasingsubstantiallyinthetoptwoincomegroups,butfallingbymore than60percentinthegroupof familiesheadedbysomeoneaged35to44.Forfamilies withanequityinterestinanannuity,themedianholdingincreased14.5percent,to$60,000 31 Annuitiesmaybethoseinwhichthefamilyhasanequityinterestintheassetorinwhichthefamilypossesses anentitlementonlytoastreamofincome.Thewealthfiguresinthisarticleincludeonlytheannuitiesinwhich thefamilyhasanequityinterest.In2010,5.9percentoffamiliesreportedhavinganytypeofannuity,andof thesefamilies,77.3percentreportedhavinganequityinterest.Thetrustsormanagedinvestmentaccounts includedinothermanagedassetsarethoseinwhichfamilieshaveanequityinterestandforwhichcomponent partswerenotseparatelyreported;typically,suchaccountsarethoseinwhichtheownershipiscomplicatedor themanagementisundertakenbyaprofessional.In2010,88.6percentoffamilieswithtrustsormanaged investmentaccountshadanequityinterestinsuchanaccount. Thesurveyencouragesrespondentswhohavetrustsormanagedinvestmentaccountsthatareheldinrelatively commoninvestmentstoreportthecomponentsseparately.Ofthe3.9percentoffamiliesthatreportedhaving anykindoftrustormanagedinvestmentaccountin2010,59.3percentofthemreportedatleastoneofthe componentassetsseparately.Offamiliesthatdetailedthecomponentsin2010,89.2percentreportedsometype offinancialasset,11.5percentreportedaprimaryresidence,17.0percentreportedotherrealestate,5.0percent reportedabusiness,and2.0percentreportedanothertypeofasset(datanotshowninthetables).Thefraction ofthesefamiliesreportingtheprimaryresidenceasacomponentofatrustdecreased7.4percentagepoints between2007and2010,andthefractionreportingabusinessdecreased10.3percentagepoints.
68 FederalReserveBulletin|June2012 in2010;forfamilieswithatrustormanagedinvestmentaccountasdefinedinthisarticle, themedianholdingfell13.3percent,to$109,000(datanotshowninthetables). Asnotedinthediscussionof retirementaccounts,somefamiliesusesettlementsfrom retirementaccountstopurchaseanannuity.In2010,35.0percentof familieswithannuities haddoneso(datanotshowninthetables).Of thesefamilies,73.7percenthadanequity interestintheirannuities. Other Financial Assets Ownershipof otherfinancialassets—aheterogeneouscategoryincludingoilandgasleases, futurescontracts,royalties,proceedsfromlawsuitsorestatesinsettlement,andloansmade toothers—fell1.3percentagepointsbetween2007and2010,to8.0percent.Ownershipof suchassetstendstobemorecommonamonghigherincomeandwealthgroups,younger agegroups,andfamiliesheadedbyapersonwhoisself-employedorretired.Ownership acrossdemographicgroupsgenerallydeclinedoverthisperiod,whilethemedianholding forthosewhohadsuchassetsdecreased20.6percent,to$5,000. Holdingsmaybegroupedintofourcategories:cash,whichincludesmoneyowedtofamiliesbyotherpersons;futureproceeds,whichincludeamountstobereceivedfromalawsuit, estate,orothertypeof settlement;employmentandbusiness-relateditems,whichinclude deferredcompensation,royalties,futurescontracts,andderivatives;andother.Asshownin thefollowingtable,theproportionof familiesholdingvarioustypesof otherfinancial assetsremainedfairlyconstantoverthethree-yearperiod,withcashbeingbyfarthemost frequentlyheldcomponent: Table6.9 Allfamilies Typeofotherfinancialasset 2010 Change,2007–10 (percent) (percentagepoints) Cash 6.8 –1.3 Futureproceeds .8 –.1 Businessitems .4 † Other .2 .2 †Lessthan0.05percent. Somepubliclytradedcompaniesofferstockoptionstotheiremployeesasaformof compensation.32Althoughstockoptions,whenexecuted,mayrepresentanappreciablepartof afamily’snetworth,thesurveydoesnotspecificallyaskforthevalueof theseoptions.33 Instead,thesurveyaskswhetherthefamilyheadorthatperson’sspouseorpartnerhad beengivenstockoptionsbyanemployerduringtheprecedingyear.In2010,6.2percentof familiesreportedhavingreceivedstockoptions,adeclineof 2.1percentagepointsbelow thelevelin2007;thisdecreasecontinuesadownwardtrendsincethepeakof 11.4percent recordedintheSCFin2001(datanotshowninthetables). 32 SeeJeffreyL.Schildkraut(2004),“StockOptions:NationalCompensationSurveyUpdate”(Washington: BureauofLaborStatistics,September),www.bls.gov/opub/cwc/cm20040628yb01p1.htm. 33 Becausesuchoptionsaretypicallynotpubliclytradedortheirexecutionisotherwiseconstrained,theirvalueis uncertainuntiltheexercisedate;untilthen,meaningfulvaluationwouldrequirecomplexassumptionsabout thefuturebehaviorofstockprices.
ChangesinU.S.FamilyFinancesfrom2007to2010 69 Table7.Directandindirectfamilyholdingsofstock,byselectedcharacteristicsoffamilies,2001–10 surveys Percentexceptasnoted Family Familieshavingstockholdings,director Medianvalueamongfamilieswith Stockholdingsasshareofgroup's characteristic indirect holdings(thousandsof2010dollars) financialassets 2001 2004 2007 2010 2001 2004 2007 2010 2001 2004 2007 2010 Allfamilies 52.3 50.3 53.2 49.9 42.3 37.7 35.5 29.0 56.0 51.4 54.0 47.0 Percentileofincome Lessthan20 12.9 11.7 14.3 12.5 9.2 8.6 6.3 5.3 37.4 32.0 39.2 40.5 20–39.9 34.3 29.8 36.5 30.5 9.2 11.5 8.7 7.1 35.6 30.9 34.6 31.3 40–59.9 52.6 51.9 52.9 51.7 18.4 16.9 18.3 12.0 46.8 43.4 39.5 37.5 60–79.9 75.9 69.9 73.3 68.1 35.5 30.6 35.2 22.3 52.0 41.9 53.1 41.6 80–89.9 82.1 83.9 86.3 82.6 79.2 65.0 66.1 57.9 57.3 48.9 50.5 44.4 90–100 89.7 92.7 91.5 90.6 305.2 235.8 234.7 267.5 60.4 57.6 58.3 50.9 Ageofhead(years) Lessthan35 49.1 40.8 41.6 39.8 8.6 9.2 6.8 7.0 52.5 40.4 45.6 39.3 35–44 59.7 54.5 55.9 50.1 33.7 23.0 25.7 19.8 57.2 53.7 54.7 50.5 45–54 59.4 56.6 63.1 58.0 61.3 57.5 47.1 37.8 59.2 53.8 54.5 48.6 55–64 57.4 63.2 60.8 59.7 98.6 80.5 81.7 56.0 56.0 55.2 55.6 48.3 65–74 40.0 46.9 53.1 45.6 184.2 80.5 58.1 78.1 55.4 51.5 55.6 44.2 75ormore 35.7 34.8 40.2 42.0 134.8 98.8 47.1 55.0 51.8 39.3 48.2 44.6 Housingstatus Owner 62.5 61.0 64.6 61.3 61.3 51.8 41.9 39.9 56.7 52.0 54.5 47.5 Renterorother 31.0 26.5 28.1 26.3 8.6 10.1 8.2 6.0 46.1 39.3 46.2 37.3 Note:Indirectholdingsarethoseinpooledinvestmenttrusts,retirementaccounts,andothermanagedassets.Seealsonotetotable1. Direct and Indirect Holdings of Publicly Traded Stocks Familiesmayholdstocksinpubliclytradedcompaniesdirectlyorindirectly,andinformationabouteachof theseformsof ownershipiscollectedseparatelyintheSCF.Whendirect andindirectformsarecombined,the2010datashowadeclineinstockownershiptolevels notseenintheSCFsincethelate1990s(table7).Between2007and2010,thefractionof familiesholdinganysuchstockfell3.3percentagepointsto49.9percent,alevelwellbelow the2007peak.Muchlikeownershipof directlyheldstock,ownershipof directandindirect equityholdingsismorecommonamonghigher-incomegroupsandamongfamiliesheaded byapersonaged35to64.Overtherecentthree-yearperiod,ownershipdecreasedforall incomegroups.Acrossagegroups,ownershipfellthemost—7.5percentagepoints—for familiesheadedbypersonsaged65to74;forotheragegroups,thedeclinesweremuch moremodest,andforsome,ownershiprateswerebasicallyunchangedorroseslightly. Theoverallmedianvalueof directandindirectstockholdingsdropped18.3percent between2007and2010.Changesinthemedianvalueacrossdemographicgroupsweregenerallynegative,withtheexceptionof thehighestincomedecileandfamiliesheadedbya personagedlessthan35orbyapersonaged65orolder.Asaproportionof financial assets,holdingsfellfrom54.0percentin2007to47.0percentin2010.Thelowestincome quintileistheonlydemographicgroupthatsawanincreaseintheshareof financialassets heldinstocks,risingfrom39.2percentin2007to40.5percentin2010. Amongfamiliesthatheldequity,eitherdirectlyorindirectlyin2010,ownershipthrougha tax-deferredretirementaccountwasmostcommon,followedbydirectholdingsof stocks, directholdingsof pooledinvestmentfunds,andmanagedinvestmentaccountsoranequity interestinatrustorannuity.Overthe2007–10period,ownershipof equityholdings throughtax-deferredaccountsrose,whilebothdirectownershipof equityandownership throughpooledinvestmentfundsfell.Ownershipof equitythroughatrustorannuitywas
70 FederalReserveBulletin|June2012 basicallyunchanged.Thefractionof equityownerswithmultipletypesalsodeclined,as showninthefollowingtable: Table7.1 Familieswithequity Typeofdirect orindirectequity 2010 Change,2007–10 (percent) (percentagepoints) Tax-deferredaccount 85.9 .9 Directlyheldstock 30.3 –3.4 Directlyheldpooledinvestmentfund 16.6 –3.7 Managedinvestmentaccount,orequityinterestinatrustor annuity 8.1 .3 MEMO Multipletypes 32.8 –3.6 Thedistributionof amountsof holdingsoverthesetypesof equitiesshowsadifferentpattern.Of thetotalamountof equity,42.3percentwasheldintax-deferredretirement accounts,30.9percentasdirectlyheldstocks,20.4percentasdirectlyheldpooledinvestmentfunds,and6.4percentasothermanagedassets(datanotshowninthetables). Nonfinancial Assets Bydefinition,adecreaseinnonfinancialassetsasashareof totalassetsfrom2007to2010 mustexactlyoffsetthe3.9percentagepointriseintheshareof financialassetsfrom2007to 2010thatwasdiscussedearlierinthisarticle(table5).Inanygivensurvey,thechangesin thesesharesaredrivenbyspendingdecisions,changesinportfoliochoices,portfoliovaluation,orallthree.Between2007and2010,thelargestdriversweredeclinesinhousevalues andbusinessequity. Overthe2007to2010period,housingasashareof totalnonfinancialassetsfell0.6percentagepoint,whilebusinessequityasashareof totalnonfinancialassetsfell1.5percentagepoints(table8).However,housingisamuchlargershareof totalnonfinancialassets thanbusinessequityinanygivenyear,sothetwoassettypesaccountforroughlythesame shareof theoveralldeclineintheratioof nonfinancialtototalassets.Thatis,of the 3.9percentagepointdecreaseintheoverallshareof nonfinancialassets,housingandbusinessequityeachaccountedforapproximately2.2percentagepoints.Otherresidentialpropertycontributedslightlytothedecline(0.2percentagepoint).Thesedropsinassetshares Table8.Valueofnonfinancialassetsofallfamilies,distributedbytypeofasset,2001–10surveys Percent Typeofnonfinancialasset 2001 2004 2007 2010 Vehicles1 5.9 5.1 4.4 5.2 Primaryresidence 46.9 50.3 48.0 47.4 Otherresidentialproperty 8.1 9.9 10.7 11.2 Equityinnonresidentialproperty 8.2 7.3 5.8 6.7 Businessequity 29.3 25.9 29.7 28.2 Other 1.6 1.5 1.3 1.3 Total 100 100 100 100 MEMO Nonfinancialassetsasashareoftotal assets 57.8 64.2 66.0 62.1 Note:Seenotetotable1. 1 Fordefinition,seetextnote34.
ChangesinU.S.FamilyFinancesfrom2007to2010 71 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys A.2007SurveyofConsumerFinances Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Percentageoffamiliesholdingasset Allfamilies 87.0 68.6 13.8 8.1 13.6 7.2 92.0 97.7 Percentileofincome Lessthan20 64.4 41.4 5.4 2.5 3.3 3.9 73.5 89.8 20–39.9 85.9 55.2 6.5 3.9 5.3 5.7 91.2 98.9 40–59.9 94.3 69.3 9.9 7.5 10.6 7.4 97.2 100.0 60–79.9 95.4 83.9 15.4 9.4 18.1 7.2 98.5 100.0 80–89.9 95.6 92.6 21.0 13.6 20.0 9.0 99.6 100.0 90–100 94.8 94.3 42.2 21.0 40.9 14.1 99.7 100.0 Ageofhead(years) Lessthan35 85.4 40.6 5.6 3.2 8.0 5.8 88.2 97.1 35–44 87.5 66.1 12.0 7.5 18.2 5.5 91.3 96.9 45–54 90.3 77.3 15.7 9.5 17.2 8.7 95.0 97.6 55–64 92.2 81.0 20.9 11.5 18.1 8.5 95.6 99.1 65–74 90.6 85.5 18.9 12.3 11.2 9.1 94.5 98.4 75ormore 71.5 77.0 13.4 6.8 4.5 5.8 87.3 98.1 Familystructure Singlewithchild(ren) 77.3 48.9 7.4 4.3 7.5 5.4 85.0 93.8 Single,nochild,ageless than55 78.4 43.4 6.2 3.2 8.8 7.6 83.6 94.8 Single,nochild,age55 ormore 73.7 67.5 12.1 7.1 3.6 5.9 85.0 97.6 Couplewithchild(ren) 94.9 78.1 15.5 9.8 18.5 6.3 97.4 99.2 Couple,nochild 94.0 80.1 19.4 10.9 18.4 9.3 97.0 99.4 Educationofhead Nohighschooldiploma 73.7 52.8 5.8 2.6 5.9 2.2 80.9 91.7 Highschooldiploma 87.5 68.9 10.0 7.3 9.5 5.1 92.2 97.7 Somecollege 86.7 62.3 13.2 6.5 12.7 7.0 91.0 98.6 Collegedegree 91.9 77.8 20.6 11.9 20.7 11.0 96.6 99.6 wereoffsetbya0.8percentagepointincreaseintheshareof vehiclesanda0.9percentage pointincreaseintheshareof nonresidentialproperty. In2010,thelevelof ownershipof nonfinancialassetswas91.3percentof families,0.7percentagepointlowerthanin2007(firsthalf of tables9.Aand9.B,next-to-lastcolumn). Acrossmostof thedemographicgroupsshown,the2010ownershipratewas80percentor more;exceptionswerethelowestincomeandwealthgroups,familiesheadedbyaperson whowasneitherworkingnorretired,andrenters.Overthe2007–10period,ownershipfell mostfortheless-than-35agegroup,childlesssinglefamiliesheadedbysomeoneyounger thanage55,nonwhiteorHispanicfamilies,familieslivingintheSouthortheWest,and familiesinthelowestquartileof thenetworthdistribution. Overtherecentperiod,themedianholdingsof nonfinancialassetsforfamilieshavingany suchassetsfell16.8percent,andthemeanfell17.6percent.Acrossdemographicgroups, substantialdeclinesinthemediansfaroutnumberedincreases.Thelargestdropsinthe medianvalueoccurredforthelowestquintileof theincomedistribution;familiesheaded bysomeonewithlessthanahighschooldiploma;familiesheadedbysomeoneworkingin technical,sales,orserviceoccupations;andfamiliesinthesecondquartileof thenetworth distribution.Medianholdingsinchedupforafewdemographicgroupswhosetotalnonfinancialholdingstendtoberelativelylowandthataregenerallynotdominatedbyhousing orbusinessassets.
72 FederalReserveBulletin|June2012 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys—continued A.2007SurveyofConsumerFinances—continued Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Raceorethnicityofrespondent Whitenon-Hispanic 89.6 75.6 15.3 9.0 15.8 8.3 94.6 98.9 NonwhiteorHispanic 80.9 51.9 10.0 5.9 8.2 4.3 85.8 94.9 Currentworkstatusofhead Workingfor someoneelse 91.3 67.2 11.9 7.0 7.7 7.1 94.4 98.7 Self-employed 90.6 82.4 26.5 17.3 74.9 11.0 97.6 99.7 Retired 78.6 72.9 14.6 7.7 3.8 5.4 87.2 96.1 Othernotworking 69.3 33.1 3.8 4.7 3.7 8.2 74.8 90.0 Currentoccupationofhead Managerialor professional 93.1 78.2 20.7 10.8 25.4 9.9 97.2 99.8 Technical,sales,or services 87.4 61.5 10.2 7.3 10.8 7.7 91.6 97.8 Otheroccupation 92.6 66.3 9.6 6.7 14.7 4.9 95.2 98.5 Retiredorothernot working 77.1 66.7 12.9 7.2 3.8 5.8 85.2 95.2 Region Northeast 75.4 66.1 13.3 5.6 9.1 5.5 84.2 94.6 Midwest 89.5 71.3 13.7 8.4 15.4 6.4 93.4 98.4 South 89.2 70.1 11.3 8.8 12.6 7.2 93.8 98.5 West 90.5 65.4 18.3 8.7 16.9 9.3 94.1 98.4 Urbanicity Metropolitanstatistical area(MSA) 86.2 68.1 14.2 7.6 13.9 7.6 91.5 97.7 Non-MSA 90.9 71.1 11.7 10.7 11.8 5.1 94.3 97.9 Housingstatus Owner 93.8 100.0 17.5 10.8 17.5 8.0 100.0 100.0 Renterorother 72.3 * 5.6 2.1 5.0 5.3 74.5 92.8 Percentileofnetworth Lessthan25 69.5 13.7 * * 2.3 2.4 71.6 91.0 25–49.9 91.2 72.2 7.1 3.7 7.5 6.4 97.7 100.0 50–74.9 93.3 92.8 11.9 7.6 13.4 7.8 99.5 100.0 75–89.9 94.5 95.2 26.4 16.5 19.6 7.3 99.0 100.0 90–100 93.6 96.8 47.5 27.2 48.3 19.0 99.6 100.0 Vehicles Vehiclescontinuetobethemostcommonlyheldnonfinancialasset.34From2007to2010, theshareof familiesthatownedsometypeof vehicleedgeddown0.3percentagepointto 86.7percent.Trendsinownershipratesovertherecentthreeyearsweremixedacrossmost demographicgroups.Acrossagegroups,ownershipdecreasedfortheless-than-35and 55-to-74agegroupswhilerisingforthe75-or-moreagecategory.Vehicleownership decreasedforsinglefamilieswithoutchildrenheadedbysomeoneyoungerthanage55; familiesheadedbyapersonwithahighschooldegree,somecollege,oracollegedegree; familiesheadedbyapersonwhowasworkingforsomeoneelse,self-employed,orincluded inanyoccupationgroupexceptretired;nonwhiteorHispanicfamilies;familieslivinginthe SouthortheWest;andrenters. 34 Thedefinitionofvehiclesinthisarticleisabroadonethatincludescars,vans,sportutilityvehicles,trucks, motorhomes,recreationalvehicles,motorcycles,boats,airplanes,andhelicopters.Offamiliesowninganytype ofvehiclein2010,99.8percenthadacar,van,sportutilityvehicle,motorcycle,ortruck.Theremainingtypes ofvehicleswereheldby14.4percentoffamilies.
ChangesinU.S.FamilyFinancesfrom2007to2010 73 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys––continued A.2007SurveyofConsumerFinances––continued Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Medianvalueofholdingsforfamiliesholdingasset(thousandsof2010dollars) Allfamilies 16.2 209.5 154.0 78.6 96.6 14.7 185.9 232.1 Percentileofincome Lessthan20 5.9 104.8 62.9 68.1 52.4 3.1 41.9 24.6 20–39.9 9.6 125.7 60.2 62.9 20.4 6.3 80.9 89.0 40–59.9 15.3 157.2 104.8 41.9 32.2 10.5 145.6 192.2 60–79.9 21.4 225.3 125.7 74.4 57.8 15.7 258.0 359.8 80–89.9 26.6 314.3 183.3 75.4 75.5 21.0 377.3 593.6 90–100 35.5 523.8 340.5 183.3 397.6 78.6 838.0 1,423.2 Ageofhead(years) Lessthan35 14.0 183.3 89.1 52.4 36.7 8.7 32.3 40.7 35–44 18.3 214.8 157.2 52.4 61.8 10.5 191.3 232.9 45–54 19.6 241.0 157.2 83.8 80.5 15.7 235.6 320.6 55–64 18.2 220.0 164.5 94.3 104.8 21.0 244.2 365.1 65–74 15.3 209.5 157.2 78.6 314.3 21.0 222.3 317.8 75ormore 9.8 157.2 104.8 115.2 235.7 26.2 164.5 229.8 Familystructure Singlewithchild(ren) 9.0 157.2 52.4 45.1 52.4 10.5 85.2 74.4 Single,nochild,ageless than55 10.3 162.4 157.2 52.4 34.0 8.7 56.6 61.5 Single,nochild,age55 ormore 8.0 151.9 83.8 78.6 261.9 10.5 141.4 191.5 Couplewithchild(ren) 22.6 251.4 157.2 68.1 94.3 15.7 249.3 312.1 Couple,nochild 20.2 220.0 188.6 104.8 104.8 24.6 240.7 342.4 Educationofhead Nohighschooldiploma 10.9 128.4 68.1 131.0 61.8 13.8 88.4 67.7 Highschooldiploma 13.9 157.2 79.6 52.4 94.3 7.6 144.2 169.6 Somecollege 15.2 201.2 104.8 55.3 47.1 13.6 164.8 195.2 Collegedegree 20.8 293.4 209.5 94.3 104.8 23.0 303.2 456.5 Note:Seenotetotable1. Giventheslowdowninpurchasesof newcarsduringtheperiodbetween2007and2010 notedearlierandtheconsequentagingof families’holdingsof vehicles,itisnotsurprising thatthemedianmarketvalueof vehiclesforthosewhoownedatleastonevehicledeclined 5.6percentfrom2007to2010,andthemeandeclined4.3percent.35Indeed,themedian valueof vehicleholdingswasflatorrisingonlyforhigher-incomeorhigher-wealthgroups, familiesheadedbysomeoneaged65orolder,andfamiliesintheother-not-workingworkstatusgroup.Thelargestdeclinesinthemedianwereobservedforthethirdandfourth quintilesof income,thelowestthreequartilesof wealth,andfamiliesheadedbysomeone youngerthan55yearsof age.Continuingatrend,theshareof thetotalvalueof owned vehiclesattributabletosportutilityvehiclesroseovertherecentperiodfrom21.5percentto 23.8percent(datanotshowninthetables). Somefamilieshavevehiclesthattheyleaseorthatareprovidedtothembyanemployerfor personaluse.Theshareof familieshavingavehiclefromanysourcefell0.7percentage pointovertherecentperiod,to88.9percent(datanotshowninthetables).Thesmalldif- 35 Surveyrespondentsareaskedtoprovidetheyear,make,andmodelofeachoftheircars,vans,sportutility vehicles,andtrucks.ThisinformationisusedtoobtainmarketpricesfromdatacollectedbytheNationalAutomobileDealersAssociationandavarietyofothersources.Forothertypesofvehicles,therespondentisasked toprovideabestestimateofthecurrentvalue.
74 FederalReserveBulletin|June2012 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys––continued A.2007SurveyofConsumerFinances––continued Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Raceorethnicityofrespondent Whitenon-Hispanic 17.9 209.5 143.0 78.6 104.8 15.7 213.8 285.2 NonwhiteorHispanic 12.5 188.6 183.3 65.7 52.4 8.4 106.8 93.5 Currentworkstatusofhead Workingfor someoneelse 17.8 209.5 125.7 55.3 21.0 10.5 175.1 223.5 Self-employed 23.2 314.3 314.3 159.8 110.0 52.4 476.7 569.8 Retired 11.9 162.4 104.8 78.6 157.2 13.8 163.4 213.2 Othernotworking 7.2 167.6 136.7 51.1 98.1 2.6 30.7 29.1 Currentoccupationofhead Managerialor professional 21.2 282.9 209.5 110.0 118.8 21.0 292.2 431.0 Technical,sales,or services 15.1 209.5 131.0 89.1 26.2 15.7 162.4 195.9 Otheroccupation 17.5 165.4 94.3 38.8 61.8 10.5 142.0 165.1 Retiredorothernot working 10.9 162.4 104.8 78.6 157.2 13.1 154.5 186.0 Region Northeast 15.1 288.1 199.1 117.3 104.8 21.0 261.9 304.2 Midwest 15.2 162.4 115.2 55.3 104.8 10.5 165.0 214.5 South 16.3 167.6 125.7 74.9 62.9 15.7 152.7 189.6 West 17.9 314.3 225.3 94.3 99.5 14.7 263.5 308.5 Urbanicity Metropolitanstatistical area(MSA) 16.6 230.5 157.2 86.4 98.1 14.1 203.2 255.7 Non-MSA 15.1 120.5 99.5 52.4 94.3 23.0 124.2 156.3 Housingstatus Owner 19.3 209.5 157.2 83.8 104.8 21.0 265.6 361.4 Renterorother 9.0 * 89.1 39.8 34.6 5.6 10.6 14.2 Percentileofnetworth Lessthan25 7.2 89.2 * * .5 1.4 9.0 8.5 25–49.9 13.7 104.8 31.4 26.2 12.0 7.9 100.4 113.4 50–74.9 18.3 209.5 62.9 41.9 52.4 13.6 240.8 319.3 75–89.9 22.9 330.0 153.0 86.4 104.8 31.4 460.1 721.6 90–100 32.8 588.6 419.1 279.4 639.1 71.2 1,215.3 2,211.1 MEMO Meanvalueofholdings forfamiliesholding asset 23.1 316.9 352.3 324.2 991.4 84.6 492.0 702.1 *Tenorfewerobservations. ferencebetweenthisrateandtheownershiprateforpersonallyownedvehiclesbeliesa largerchangeintheratesof holdingforleasedandemployer-providedvehicles.Theproportionof familieswithaleasedvehiclefellfrom5.2percentin2007to3.0percentin2010, whilethatof familieswithanemployer-providedvehiclefelllessdramatically,from6.8percentto6.4percentovertherecentperiod. Primary Residence and Other Residential Real Estate Thehomeownershipratefell1.3percentagepointsoverthe2007−10period,to67.3percent.36Homeownershiphadfalleninthepreviousthree-yearperiodaswellafterreachinga 36 Thismeasureofprimaryresidencescomprisesmobilehomesandtheirsites,thepartsoffarmsandranchesnot usedforafarmingorranchingbusiness,condominiums,cooperatives,townhouses,othersingle-familyhomes,
ChangesinU.S.FamilyFinancesfrom2007to2010 75 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys––continued B.2010SurveyofConsumerFinances Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Percentageoffamiliesholdingasset Allfamilies 86.7 67.3 14.4 7.7 13.3 7.0 91.3 97.4 Percentileofincome Lessthan20 64.9 37.2 4.4 3.9 5.1 2.7 72.0 89.9 20–39.9 85.4 55.9 7.4 5.2 6.6 4.4 90.7 98.0 40–59.9 91.8 71.1 11.6 6.3 10.6 7.3 96.0 99.5 60–79.9 95.4 80.7 16.0 7.9 15.5 9.3 98.6 99.9 80–89.9 96.4 90.6 22.8 11.4 19.3 10.8 99.4 100.0 90–100 95.7 92.4 42.1 18.8 37.6 12.3 99.4 100.0 Ageofhead(years) Lessthan35 79.4 37.5 4.5 2.3 8.4 6.1 82.8 95.5 35–44 88.9 63.8 9.7 3.9 11.2 4.2 92.7 97.4 45–54 91.0 75.2 17.0 7.5 16.8 6.7 94.7 98.3 55–64 90.3 78.1 22.1 12.6 19.6 9.6 94.4 98.3 65–74 86.5 82.6 22.8 11.0 15.8 11.0 92.6 97.1 75ormore 83.4 81.9 14.6 13.4 6.0 6.0 93.0 98.7 Familystructure Singlewithchild(ren) 79.1 52.0 6.2 4.0 5.2 3.9 84.5 94.6 Single,nochild,ageless than55 74.6 40.2 6.3 2.4 7.4 5.7 80.7 95.3 Single,nochild,age55 ormore 76.3 66.7 11.8 8.2 6.6 8.0 86.8 96.6 Couplewithchild(ren) 94.8 75.6 15.5 7.1 17.0 5.9 97.0 99.0 Couple,nochild 93.2 79.7 22.6 12.8 19.5 10.0 96.3 98.5 Educationofhead Nohighschooldiploma 76.2 54.3 5.0 3.3 5.2 1.3 82.2 92.5 Highschooldiploma 85.8 64.7 10.0 6.9 10.9 5.5 90.5 96.5 Somecollege 85.4 61.5 11.7 6.4 11.2 7.6 89.6 98.2 Collegedegree 91.5 76.6 22.4 10.4 18.9 9.9 95.9 99.5 peakof 69.1percentof familiesin2004.The2010homeownershiprateisroughlythesame asitwasin2001,whichwas3.0percentagepointshigherthantheratein1995(datanot showninthetables). In2010,groupsthathadanownershipratelessthantheoverallrateincludednonwhiteor Hispanicfamilies;familieswithrelativelylowincomeorwealth;familieslivinginthe NortheastortheWest;singlefamilies;andfamiliesheadedbyapersonwhowasworking forsomeoneelse,whowasneitherworkingnorretired,whowasagedlessthan45,orwho hadlessthanacollegedegree.Overthethree-yearperiod,homeownershipfellmostforthe lowestquintileof theincomedistribution;familiesinthesecondquartileof thenetworth distribution;familiesheadedbyapersonwhowasself-employedorworkinginatechnical, sales,orservicejob;andfamiliesheadedbyahighschoolgraduate.Acrossgeographic regions,thedeclineinownershipwasmostpronouncedintheSouthandWestregionsbut alsofellintheNortheast;incontrast,theMidwestsawa2.0percentagepointincreasein homeownership. Housingwealthrepresentsalargecomponentof totalfamilywealth;in2010,primaryresidencesaccountedfor29.5percentof totalfamilyassets.Overthe2007–10period, andotherpermanentdwellings.The2007and2010SCFestimatesofhomeownershipdifferonlymarginally fromthoseoftheCurrentPopulationSurvey(CPS)foracomparablespecificationofhousehold;theCPS showsanidenticaldeclineinthehomeownershiprate.
76 FederalReserveBulletin|June2012 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys––continued B.2010SurveyofConsumerFinances—continued Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Raceorethnicityofrespondent Whitenon-Hispanic 90.9 75.3 16.5 9.4 15.6 8.8 94.9 99.1 NonwhiteorHispanic 78.1 50.6 9.9 4.2 8.3 3.3 84.0 94.1 Currentworkstatusofhead Workingfor someoneelse 89.9 64.8 11.9 5.5 6.6 6.4 92.8 98.3 Self-employed 88.5 78.4 28.3 17.5 71.1 12.0 96.4 98.8 Retired 82.4 74.6 15.0 9.6 4.5 6.8 89.2 96.3 Othernotworking 72.8 42.9 8.7 2.8 4.1 4.8 78.6 92.5 Currentoccupationofhead Managerialor professional 91.0 76.1 22.9 10.7 25.9 9.6 95.7 99.7 Technical,sales,or services 86.7 56.0 9.7 5.1 9.6 5.1 90.1 97.7 Otheroccupation 91.1 66.6 8.4 5.6 13.8 6.6 93.8 97.1 Retiredorothernot working 80.3 67.8 13.7 8.1 4.4 6.3 86.9 95.5 Region Northeast 78.5 65.0 15.3 5.9 11.1 5.5 85.6 95.1 Midwest 90.1 73.3 11.0 7.6 13.0 5.8 93.8 98.0 South 87.5 67.6 14.1 9.4 12.5 6.6 92.1 97.5 West 88.8 62.5 17.4 6.4 16.6 10.2 92.4 98.7 Urbanicity Metropolitanstatistical area(MSA) 86.0 65.9 14.9 7.2 13.4 6.9 90.6 97.4 Non-MSA 90.2 73.9 11.9 10.1 12.3 7.8 95.0 97.8 Housingstatus Owner 93.9 100.0 19.1 10.5 17.0 8.4 100.0 100.0 Renterorother 71.9 * 4.6 1.9 5.5 4.2 73.6 92.2 Percentileofnetworth Lessthan25 67.4 21.8 2.8 .8 2.9 2.5 69.7 89.8 25–49.9 91.6 61.3 4.6 2.1 6.1 4.9 96.8 100.0 50–74.9 93.2 90.1 13.1 7.8 12.9 7.3 99.2 100.0 75–89.9 94.3 95.3 27.1 14.9 20.8 9.2 99.6 100.0 90–100 95.2 97.1 51.7 27.9 46.6 19.7 99.9 100.0 thispercentagedeclined2.2percentagepointsoverall.Therelativeimportanceof housing inthetotalassetportfoliovariessubstantiallyovertheincomedistribution,withhousing generallyconstitutingaprogressivelysmallershareof assetswithincreasinglevelsof income,asshowninthefollowingtable: Table9.1 Housevalueasapercentageofallassetsingroup Familycharacteristic 2010 Change,2007–10 (percent) (percentagepoints) Allfamilies 29.5 –2.2 Percentileofincome Lessthan20 35.6 –11.5 20–39.9 50.6 –1.2 40–59.9 44.8 –3.5 60–79.9 42.7 –2.5 80–89.9 37.5 –6.9 90–100 19.2 –.6
ChangesinU.S.FamilyFinancesfrom2007to2010 77 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys––continued B.2010SurveyofConsumerFinances––continued Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Medianvalueofholdingsforfamiliesholdingasset(thousandsof2010dollars) Allfamilies 15.3 170.0 120.0 65.0 78.7 15.0 154.6 187.2 Percentileofincome Lessthan20 5.8 89.0 82.0 36.0 25.0 5.3 23.6 15.2 20–39.9 9.3 110.0 70.0 60.0 25.3 5.0 73.5 75.4 40–59.9 13.8 135.0 82.0 60.0 44.7 10.0 131.2 159.8 60–79.9 20.1 175.0 71.0 50.0 50.0 13.0 198.3 267.0 80–89.9 27.9 250.0 120.0 58.0 82.4 22.0 311.1 448.4 90–100 35.8 475.0 320.0 200.0 455.0 35.0 756.4 1,486.7 Ageofhead(years) Lessthan35 12.4 140.0 72.0 24.0 30.0 5.0 34.2 35.7 35–44 16.5 170.0 75.0 50.0 50.0 10.0 142.8 156.3 45–54 18.4 200.0 103.5 50.0 80.0 15.0 191.4 248.4 55–64 17.8 185.0 165.0 102.0 100.0 20.0 206.6 286.6 65–74 16.0 165.0 125.0 60.0 100.0 28.1 199.8 281.7 75ormore 10.6 150.0 125.0 65.0 220.9 26.0 168.2 237.7 Familystructure Singlewithchild(ren) 9.7 134.0 100.0 50.0 20.0 15.0 79.0 70.0 Single,nochild,ageless than55 9.6 135.2 70.0 75.0 43.0 7.0 56.9 50.1 Single,nochild,age55 ormore 7.5 130.0 151.0 50.0 80.3 15.0 115.5 143.9 Couplewithchild(ren) 21.3 190.0 120.0 60.0 75.0 12.0 193.4 233.9 Couple,nochild 20.3 180.0 120.0 75.0 109.0 20.0 209.0 306.7 Educationofhead Nohighschooldiploma 9.7 95.0 75.0 30.0 27.8 5.0 59.0 47.8 Highschooldiploma 13.3 130.0 62.5 58.0 64.1 8.0 122.2 138.4 Somecollege 14.5 150.0 65.0 35.0 110.0 14.4 136.2 150.1 Collegedegree 19.5 250.0 190.0 100.0 88.0 20.0 251.5 352.6 Note:Seenotetotable1. Themedianandmeanvaluesof theprimaryresidencesof homeownersfellbetween2007 and2010;overall,themediandecreased18.9percent,andthemeanfell17.6percent. Thesepercentagelossesinthemedianandmeantranslatedintolargedollarlosses: $39,500forthemedianand$55,700forthemean.Homeownersinvirtuallyalldemographicgroupssawlossesinthemedian,andmostof thoselossesweresubstantial;theone exceptionwasthelowestquartileof thenetworthdistribution,wherehomeownership jumped8.1percentagepointsandthemedianhomevalueincreased31.2percent,most likelyreflectingacompositionalshiftwithinthatlowestwealthgroup.Otherwise,substantialdecreasesinmedianhousingvalueswerewidespread. In2010,14.4percentof familiesownedsomeformof residentialrealestateotherthana primaryresidence(secondhomes,time-shares,one-tofour-familyrentalproperties,and othertypesof residentialproperties),alevelthatisup0.6percentagepointfromthecorrespondingfigurein2007andup1.9percentagepointssince2004(datanotshowninthe tables).37Althoughthesurveydoesnotaskdirectlyaboutownershipof secondhomes, suchhomesshouldlargelybecapturedasresidentialpropertiesthatareowned100percent bythefamilyandforwhichnorentwascollected;in2010,5.8percentof familieshadat 37 Thismeasureofresidentialrealestatealsoincludesoutstandingbalancesonloansthatthefamilymayhave madetofinancethesaleofpropertiestheypreviouslyowned,whicharestillowedtothefamily.
78 FederalReserveBulletin|June2012 Table9.Familyholdingsofnonfinancialassetsandofanyasset,byselectedcharacteristicsoffamilies andtypeofasset,2007and2010surveys––continued B.2010SurveyofConsumerFinances––continued Other Equityin Any Primary Business Familycharacteristic Vehicles residential nonresidential Other nonfinancial Anyasset residence equity property property asset Raceorethnicityofrespondent Whitenon-Hispanic 16.7 175.0 140.0 75.0 97.2 15.0 183.6 238.9 NonwhiteorHispanic 12.3 139.0 70.0 50.0 43.0 10.0 86.0 76.8 Currentworkstatusofhead Workingfor someoneelse 16.3 170.0 96.0 50.0 25.0 10.0 142.7 165.7 Self-employed 21.7 270.0 250.0 132.0 100.0 30.0 370.0 440.2 Retired 11.7 150.0 100.0 62.5 125.5 25.0 155.9 198.0 Othernotworking 10.7 135.0 60.0 46.6 37.6 10.0 56.7 41.0 Currentoccupationofhead Managerialor professional 20.8 250.0 200.0 100.0 102.0 23.0 260.0 347.5 Technical,sales,or services 12.7 153.0 70.0 50.0 27.0 8.0 107.6 115.5 Otheroccupation 17.2 130.0 57.0 50.0 51.5 8.0 125.0 147.2 Retiredorothernot working 11.5 150.0 98.0 62.0 81.6 22.0 139.9 163.3 Region Northeast 16.2 260.0 154.0 65.0 70.0 30.0 220.4 260.0 Midwest 13.6 135.0 86.5 70.0 100.0 10.0 142.1 174.9 South 15.4 141.7 100.0 50.0 80.3 15.0 134.3 153.1 West 16.3 230.0 170.0 159.4 52.8 15.0 189.1 216.8 Urbanicity Metropolitanstatistical area(MSA) 15.5 181.0 135.0 70.0 73.6 15.0 168.0 200.0 Non-MSA 14.4 100.0 75.0 60.0 104.5 12.5 111.6 140.1 Housingstatus Owner 18.8 170.0 120.0 70.0 95.0 20.0 217.0 296.2 Renterorother 8.5 * 120.0 22.5 25.0 5.3 9.7 12.6 Percentileofnetworth Lessthan25 6.9 117.0 60.0 3.0 1.2 5.0 9.4 7.4 25–49.9 11.7 95.5 25.0 10.0 11.6 5.0 60.0 69.1 50–74.9 17.7 150.0 48.0 30.0 40.0 13.0 181.6 240.3 75–89.9 22.7 250.0 120.0 65.0 125.0 20.6 360.7 583.8 90–100 32.7 531.5 350.0 250.0 600.0 50.0 1,114.3 2,082.8 MEMO Meanvalueofholdings forfamiliesholding asset 22.1 261.2 288.9 321.6 788.3 66.5 405.5 612.3 *Tenorfewerobservations. leastonesuchproperty,down0.3percentagepointfrom2007butstill1.2percentagepoints higherthanin2004. Ownershipof otherresidentialrealestateismorecommonamongthehighestincomeand wealthgroups;theagegroupsbetween45and74;orfamiliesheadedbyaself-employed person,apersonworkinginamanagementorprofessionaloccupation,orapersonwho wasacollegegraduate.Overtherecentthree-yearperiod,themedianandmeanvaluesof otherresidentialrealestatedecreasedroughlyinlinewiththemedianandmeanvaluesof primaryresidencesovertherecentperiod;themedianforthosehavingsuchrealestatefell 22.1percent,andthemeanfell18.0percent.Mostof thedemographicgroupssawsubstantialdeclinesinthemedian;exceptionsweregenerallygroupswhereownershipof other residentialrealestateislow,includingthefirstandsecondquintilesof incomegroups,
ChangesinU.S.FamilyFinancesfrom2007to2010 79 familiesheadedbysomeonewithlessthanahighschooldegree,andfamiliesthatrented theirprimaryresidence. Net Equity in Nonresidential Real Estate Theownershipof nonresidentialrealestatefellslightly,to7.7percentof familiesin2010.38 Ownershipfollowsapproximatelythesamerelativedistributionacrossdemographicgroups asdoestheownershipof otherresidentialrealestate.Changesinownershipduringthe recentperiodweremixedacrossdemographicgroups.Ownershipfellmostforfamiliesin theagegroupsbetween35and54;coupleswithchildren;familiesheadedbysomeone workinginatechnical,sales,orserviceoccupation;andfamilieslivingintheWestregion. Overall,themedianvalueof suchpropertyforownersfell17.3percent,andthemeanfell 0.8percent.Particularlylargeswingsinthemedianvaluewereseenforgroupswithbelowaverageownershiprates,suggestingthatthesechangesarelikelytobedueatleastinpartto samplingvariability. Net Equity in Privately Held Businesses Theshareof familiesthatownedaprivatelyheldbusinessinterestedgeddown0.3percentagepointduringtherecentperiod,to13.3percentin2010.39Theproportionhaschanged littleoverthepastseveralsurveys.Ownershipof thistypeof assettendstoincreasewith income,wealth,andeducationandtobethehighestforfamiliesheadedbyapersonwhois aged45to64,whoismarriedorlivingwithapartner,orwhohasacollegedegree.Business ownershipisaboutthreetimesasprevalentamonghomeownersasrenters;itisgenerally lowestintheNortheastandhighestintheWest.Overtherecentthree-yearperiod,changes inownershipvariedacrossdemographicgroups,withrelativelylargedeclinesobservedfor familiesheadedbysomeone35to44yearsof age,higher-incomefamilies,andfamilieslivingintheMidwestregion.Ownershipalsofellamongfamiliesheadedbyapersonwhowas self-employed,from74.9percentin2007to71.1percentin2010. Asnotedearlier,equityinprivatelyheldbusinessesmakesupalargeportionof families’ totalnonfinancialassets.Overtherecentperiod,privatelyheldbusinessassetsasashareof nonfinancialassetsfell2.1percentagepoints.Acrossincome-distributiongroups,theshare of nonfinancialassetsattributabletobusinessequityhasaU-shape,withthelargestshares atthetopandbottomof theincomedistribution,asshowninthefollowingtable: 38 Nonresidentialrealestatecomprisesthefollowingtypesofpropertiesunlesstheyareownedthroughabusiness: commercialproperty,rentalpropertywithfiveormoreunits,farmandranchland,undevelopedland,andall othertypesofnonresidentialrealestate.Mostoften,nonresidentialrealestatepropertiesarefunctionallymore likeabusinessthanaresidentialproperty.Theymayhaveseveralowners,theyaretypicallyworthaconsiderableamount,andtheyoftencarrylargemortgages,whichappeartobepaidfromtherevenuesfromtheproperty,notthefamily’sotherincome.Asinthecaseofprivatelyownedbusinesses,thevalueofthepropertyin thisanalysisistakentobethenetvalue. 39 Theformsofbusinessinthiscategoryaresoleproprietorships,limitedpartnerships,othertypesofpartnerships,subchapterScorporationsandothertypesofcorporationsthatarenotpubliclytraded,limitedliability companies,andothertypesofprivatebusinesses.Ifthefamilysurveyedlivedonafarmorranchthatwasused atleastinpartforagriculturalbusiness,thevalueofthatpart,netofthecorrespondingshareofassociated debts,isincludedwithotherbusinessassets. Inthesurvey,self-employmentstatusandbusinessownershipareindependentlydetermined.Amongthe 13.3percentoffamilieswithabusinessin2010,71.5percenthadafamilyheadorthespouseorpartnerofthe headwhowasself-employed;amongthe13.3percentoffamiliesinwhicheithertheheadorthespouseorpartneroftheheadwasself-employed,71.2percentownedabusiness(datanotshowninthetables).
80 FederalReserveBulletin|June2012 Table9.2 Netequityinbusinessasapercentageofallassets Familycharacteristic 2010 Change,2007–10 (percent) (percentagepoints) Allfamilies 17.5 –2.1 Percentileofincome Lessthan20 19.5 .7 20–39.9 7.6 3.3 40–59.9 7.3 –1.8 60–79.9 7.9 1.1 80–89.9 8.1 –3.3 90–100 24.6 –3.4 Themedianholdingof businessequityforthosehavinganysuchequitydeclined18.5percent,whilethemeandecreased20.5percent.Themeanvaluein2010is4.1percentaboveits levelin2004,andthemedianis8.8percentlowerthanitwasin2004(datanotshowninthe tables).Ingeneral,medianbusinessequityincreasesacrossincome,age,andnetworth groups,andthemediansforwhitenon-Hispanicfamiliesandhomeownersaresubstantially higherthanforthecomplementarygroups.Overtherecentthree-yearperiod,large increasesinmediannetequityinbusinesseswereobservedinthesecond,third,andfifth incomequintiles;thebottomwealthquartile;andtheSouthregion.Therewerelarge declinesinmedianholdingsforfamiliesinthelowestincomequintileandintheWestand Northeastregions. TheSCFclassifiesprivatelyownedbusinessinterestsintothoseinwhichthefamilyhasan activemanagementroleandthoseinwhichitdoesnot.Of familieshavinganybusiness interestsin2010,94.0percenthadanactiverole,and10.1percenthadanon-activerole; 4.1percenthadinterestsof bothtypes(datanotshowninthetables).Intermsof assets,activelymanagedinterestsaccountedfor87.5percentof totalprivatelyownedbusinessinterests.Themediannumberof activelymanagedbusinesseswas1.Thebusinesses reportedinthesurveywereamixtureof verysmallbusinesseswithmoderatevaluesand businesseswithsubstantiallygreatervalues. TheSCFattemptstocollectinformationaboutitemsownedorowedbyafamily’sbusiness interestsseparatelyfromitemsownedoroweddirectlybythefamily.But,inpractice,the balancesheetof abusinessthatisactivelymanagedbyafamilyisnotalwaysseparatefrom thatof thefamilyitself.40Familiesoftenusepersonalassetsascollateralorguaranteesfor loansforthebusinesses,ortheyloanpersonalfundstotheirbusinesses.In2010,18.2percentof familieswithactivelymanagedbusinessesreportedusingpersonalassetsascollateral,whichisupslightlyfrom17.8percentin2007;atthesametime,15.2percentof familiesreportedlendingthebusinessmoney,whichisdownfrom17.5percentin2007(datanot showninthetables). Familieswithmorethanoneactivelymanagedbusinessareaskedtoreportwhichbusiness ismostimportant;thatbusinessisdesignatedastheprimaryone.41In2010,thevastmajorityof primarybusinessesoperatedinanindustryotherthanmanufacturing;themostcommonorganizationalformof thosebusinesseswassoleproprietorship,andthemediannumberof employeeswas2.However,primaryactivelymanagedbusinesseswithmorethantwo 40 Technically,inasoleproprietorship,thereisnolegaldistinctionbetweenthebalancesheetofthebusinessand thatofitsowner. 41 Forfamilieswithonlyonebusiness,thatbusinessis,bydefault,consideredtheprimaryone.In2010,primary activelymanagedbusinessesaccountedfor76.3percentofthevalueofallactivelymanagedbusinesses.
ChangesinU.S.FamilyFinancesfrom2007to2010 81 employeesaccountedfor79.5percentof thevalueof allsuchbusinesses,andthelargest sharesof valuewereattributabletobusinessesorganizedassubchapterScorporationsor limitedliabilitycompanies,eachof whichaccountedforapproximately30percent. Thesepatternsarealsotypicalof thoseobservedintheearliersurveys(datanotshownin thetables). Other Nonfinancial Assets In2010,ownershipof theremainingnonfinancialassets(tangibleitemsincludingsubstantialholdingsof artwork,jewelry,preciousmetals,antiques,hobbyequipment,andcollectibles)wasnotverywidespreadanddecreasedmarginallycomparedwiththelevelinthe previoussurveyperiod,to7.0percent.Amongothernonfinancialassets,themostcommonlyhelditemsareantiquesandothercollectibles,whichwerereportedbyonly3.0percentof familiesin2010.Thecompositionof othernonfinancialassetschangedlittlefrom 2007to2010,asshowninthefollowingtable: Table9.3 Allfamilies Typeofothernonfinancialasset 2010 Change,2007–10 (percent) (percentagepoints) Gold,silver,orjewelry 2.3 .2 Antiques,collectibles 3.0 –.5 Artobjects 1.6 –.2 Other 1.4 .5 Groupsmostlikelytoholdothernonfinancialassetsgenerallyincludefamiliesinthetop twodecilesof theincomedistribution,familiesheadedbyacollegegraduate,homeowners, andfamiliesinthetopquartileof thenetworthdistribution.Minorchangesinholdings wereevidentacrossallof thedemographicgroups.Forfamilieshavingsuchassets,the medianvaluerose2.0percentovertherecentperiod,andthemeanfell21.4percent.Across incomeandwealthcategories,medianholdingsgenerallyfellforfamiliesinmiddleandtop groups. Unrealized Capital Gains Changesinthevaluesof assetssuchasstock,realestate,andbusinessesthatfamiliesown areoftenakeydeterminantof changesintheirnetworth.Unrealizedgainsarenetchanges inthevalueof assetsthatareyettobesold;such“gains”maybepositiveornegative.To obtaininformationonthispartof networth,thesurveyasksaboutchangesinvaluefrom thetimeof purchaseforcertainkeyassets—publiclytradedstocks,pooledinvestment funds,theprimaryresidence,andotherrealestate.Inaddition,itasksaboutthetaxcost basisof anybusinessholdings,andthisfigure,alongwiththecurrentvalue,maybeusedas acredibleindicatorof unrealizedgains.42Amongfamilieswithanyunrealizedcapitalgain, themedianvalueof thatgainfell52.7percentoverthe2007–10period,andthemeanfell 39.1percent(table10).Thesedeclinespushedunrealizedcapitalgainsasashareof total familyassetsdownto24.5percent,wellbelowthepeakof 36.1percentobservedin2007. Thedecreaseinmedianandmeanunrealizedgainswasuniversalacrossthetypesof familiesandassetsconsideredhere.Themedianof unrealizedgainsonrealestatefell50.5percent,themedianonbusinessassetsdeclined23.7percent,andthemedianof unrealized 42 Thesurveydoesnotcollectinformationoncapitalgainsoneveryassetforwhichsuchgainsarepossible.Most important,itdoesnotcollectsuchinformationforretirementaccounts.
82 FederalReserveBulletin|June2012 Table10.Familyholdingsofunrealizedcapitalgainsonselectedassetsasashareoftotalassets,by selectedcharacteristicsoffamilies,2001–10surveys Percentexceptasnoted 2001 2004 2007 2010 Family characteristic Real Busi- Finan- Real Busi- Finan- Real Busi- Finan- Real Busi- Finan- All All All All estate ness cial estate ness cial estate ness cial estate ness cial Allfamilies 15.4 11.6 2.3 29.3 19.3 10.9 1.1 31.2 19.3 14.2 2.6 36.1 12.8 10.6 1.1 24.5 Percentileofincome Lessthan20 26.7 2.0 –.1 28.6 29.4 7.7 –.6 36.5 30.6 10.6 1.4 42.7 22.8 8.5 .3 31.6 20–39.9 27.2 3.9 –.3 30.9 28.8 5.9 .3 35.0 31.6 3.2 .3 35.1 23.7 4.3 –.2 27.8 40–59.9 18.9 3.9 .2 22.9 25.9 3.0 .5 29.4 24.7 5.6 .8 31.1 18.5 3.8 .2 22.4 60–79.9 17.3 5.2 1.7 24.3 23.4 4.0 .5 27.9 23.4 3.8 1.6 28.9 14.2 3.8 † 17.9 80–89.9 15.9 7.8 1.8 25.5 19.7 4.4 .8 24.9 23.9 8.8 .9 33.6 13.8 4.9 –.2 18.5 90–100 12.3 16.9 3.3 32.5 15.1 16.6 1.6 33.2 14.5 20.8 3.9 39.1 9.3 15.6 2.1 27.0 Ageofhead(years) Lessthan35 8.2 10.7 2.1 20.9 13.4 7.5 –.4 20.4 12.6 14.6 1.0 28.2 2.6 9.6 –1.3 10.9 35–44 12.7 14.8 .2 27.7 16.8 11.9 1.4 30.2 16.2 12.3 .4 29.0 5.9 9.4 .6 15.8 45–54 13.1 12.6 2.0 27.7 16.6 13.4 1.1 31.1 18.6 15.5 2.1 36.2 9.7 13.7 1.0 24.5 55–64 14.8 12.4 2.0 29.2 19.8 11.8 † 31.5 18.0 15.3 3.2 36.5 13.3 10.8 1.4 25.5 65–74 21.2 10.3 3.5 35.0 22.0 8.8 2.1 32.9 21.1 13.8 4.0 38.8 15.2 10.3 .8 26.3 75ormore 21.9 5.1 5.2 32.2 27.5 5.5 2.4 35.3 29.6 11.0 4.1 44.7 23.8 6.0 2.6 32.5 MEMO Percentof familieswith anysuch gains 67.2 11.6 27.6 72.1 68.8 11.1 25.1 73.0 69.0 11.5 21.7 72.4 66.7 11.3 17.3 70.2 Medianfor thosewith anysuch gains 47.3 62.5 .6 49.0 63.9 51.8 .8 62.1 74.4 52.4 3.7 78.6 36.8 40.0 .3 37.2 Meanfor thosewith anysuch gains 126.9 555.7 46.0 224.9 170.4 594.7 25.4 259.7 192.4 843.5 83.1 342.8 114.3 563.8 39.1 208.7 Note:Seenotetotable1. †Lessthan0.05percent. gainsonthefinancialassetscoveredinthismeasurefell91.9percent,to$300in2010;the meanof unrealizedgainsinrealestatefell40.6percent,themeanonbusinessassets declined33.2percent,andthemeanof unrealizedgainsonfinancialassetsfell52.9percent. Somefamiliessawlossesonthevalueof theirassetssufficienttoeliminateanypriorgains. Amongallfamiliesin2010,15.1percentreportedanetlossontheirprimaryresidenceor otherrealestate,meaningthevaluetheyreportedforthepropertyin2010wasbelowwhat theyreportedhavingpaidforit,regardlessof whentheymadethepurchase.Thatrateis nearlytriplethe5.5percentof familiesreportingacapitallossontheirprimaryresidencein 2007andmorethantriplethe4.3percentof familiesin2004(datanotshowninthetables). Liabilities Thecompositionof familydebtshiftedbetween2007and2010.Debtsecuredbyaprimary residenceremainedthelargestcomponentof overallfamilydebt,butitsshareslipped 0.6percentagepointbetweenthemostrecentsurveys(table11).43Thisdeclineinmortgage debtwasreinforcedbya0.3percentagepointdecreaseinthefractionof debtsecuredby 43 TheSCFmeasureofliabilitiesexcludesdebtowedbybusinessesownedbythefamilyanddebtowedonnonresidentialrealestate;inthisarticle,suchdebtisnettedagainstthecorrespondingassets.
ChangesinU.S.FamilyFinancesfrom2007to2010 83 Table11.Amountofdebtofallfamilies,distributedbytypeofdebt,2001–10surveys Percent Typeofdebt 2001 2004 2007 2010 Securedbyresidentialproperty Primaryresidence 75.2 75.2 74.7 74.1 Other 6.2 8.5 10.1 9.8 Linesofcreditnotsecuredbyresidential property .5 .7 .4 1.0 Installmentloans 12.3 11.0 10.2 11.1 Creditcardbalances 3.4 3.0 3.5 2.9 Other 2.3 1.6 1.1 1.1 Total 100 100 100 100 Note:Seenotetotable1. residentialpropertyotherthantheprimaryresidence.Theshareof outstandingcreditcard balancesalsodecreased0.6percentagepointoverthethree-yearperiod.Offsettingthese relativedeclinesinmortgageandcreditcarddebtwereincreasesintheshareof liabilities accountedforbynonmortgagelinesof creditandotherinstallmentloans. Theoverallvalueof families’liabilitiesdecreasedbetween2007and2010,buttherateof declinewaslessthanthecorrespondingrateforfamilies’assets.Accordingly,theratioof thesumof thedebtof allfamiliestothesumof theirassets—theleverageratio—rosefrom 14.8percentin2007to16.4percentin2010(table12).Theleverageratioforthesubsetof familiesthathadanydebtroseatafasterpace,from19.4percentin2007to22.0percentin 2010(datanotshowninthetables). Theoverallleverageratiodiffersconsiderablyacrosstypesof familygroups.Itrisesand thenfallsacrossincomegroups.Bycomparison,theratiodeclineswithage,aresultconsistentwiththeexpectedlife-cyclepatternsof assetanddebtaccumulation.Thesegeneralpatternsintheleverageratiosamonggroupsholdacrosssurveyyears,andtheproportional increaseinleverageratiosinthemostrecentperiodwasfairlyuniformacrossincomeand agegroups. Holdings of Debt Theshareof familieswithanytypeof debtdecreased2.1percentagepointsto74.9percent overthe2007–10period(firsthalf of tables13.Aand13.B,lastcolumn),reversingan increasethathadtakenplacesince2001.Inanygivensurveyyear,borrowingislessprevalentamongchildlesssinglefamiliesheadedbyapersonaged55orolderandfamilies headedbyapersonwhoisretiredorisaged75orolder.Familiesinthelowestincome, wealth,andeducationgroups—whichtendtohavefewereconomicresources—arealsoless likelytohaveanydebt.Acrossincomegroups,borrowingratespeakamongfamiliesabove themedian.Bynetworthgroup,debtownershipalsopeaksamongfamiliesinthethird quartile.Familiesinthehighestthreeincomegroups,coupleswithchildren,andfamilies headedbyapersonemployedinamanagerialorprofessionalpositionhavecomparatively highratesof debtownership. Withfewexceptions,thefractionof familieswithanydebtfellbroadlyacrossdemographic groups.Byagegroups,debtownershipfellforthoseinthelessthan35,45-to-54,and 55-to-64agegroupsbutroseforthe75-or-oldergroup.Debtownershipfellformost incomegroups,butthelowestquintilesawanincreaseof 0.8percentagepoint.Similarly, debtownershiprose0.4percentagepointforthelowestwealthquartile.Thepercentageof familieswithdebtdecreasedjust0.9percentagepointforwhitenon-Hispanicfamiliesbut
84 FederalReserveBulletin|June2012 Table12.Leverageratioofgroupbyselectedfamilycharacteristics,2001–10surveys Percent Familycharacteristic 2001 2004 2007 2010 Allfamilies 12.0 15.0 14.8 16.4 Percentileofincome Lessthan20 13.5 15.1 13.5 18.3 20–39.9 14.5 19.4 18.6 21.4 40–59.9 19.2 23.2 24.3 26.5 60–79.9 18.0 21.6 25.3 27.7 80–89.9 18.1 22.7 23.3 23.0 90–100 7.4 9.1 8.3 9.8 Ageofhead(years) Lessthan35 33.5 46.4 44.3 51.6 35–44 22.6 26.0 28.1 37.3 45–54 13.5 17.3 16.3 19.7 55–64 7.1 9.3 10.2 11.0 65–74 4.2 5.2 6.5 7.8 75ormore 1.8 4.0 2.2 3.9 Educationofhead Nohighschooldiploma 13.4 14.0 18.2 20.3 Highschooldiploma 16.1 19.3 20.5 20.9 Somecollege 15.0 19.4 19.1 23.3 Collegedegree 10.4 13.2 12.5 14.3 Raceorethnicityofrespondent Whitenon-Hispanic 11.0 13.4 12.8 14.4 NonwhiteorHispanic 23.4 27.2 27.0 29.1 Region Northeast 10.2 12.8 12.7 14.7 Midwest 13.0 14.3 14.4 17.7 South 11.4 15.2 14.3 15.5 West 13.8 17.1 17.4 17.9 Urbanicity Metropolitanstatisticalarea(MSA) 12.0 14.7 14.6 16.2 Non-MSA 13.2 17.7 17.2 18.7 Housingstatus Owner 11.9 14.9 14.7 16.2 Renterorother 14.2 16.7 17.7 21.7 Percentileofnetworth Lessthan25 99.7 107.4 108.4 128.7 25–49.9 47.9 54.1 56.4 64.5 50–74.9 26.2 33.3 31.7 35.4 75–89.9 14.4 16.2 17.5 17.9 90–100 4.8 6.4 6.1 6.8 fell4.7percentagepointsfornonwhiteorHispanicfamilies.Familiesheadedbyaself-employedpersonsawadecreaseindebtownershipof 4.8percentagepoints,whereasthefractionfellmoremodestlyorincreasedamongfamiliesinthecomplementarywork-status categories. Theoverallmedianandmeanvaluesof outstandingdebtforfamiliesthathadanysuch debtwerelittlechangedbetween2007and2010;themedianrose0.1percent,whilethe meanfell1.1percent.Mediandebttendstorisewithincome,education,andwealth;the medianbyagepeaksamongfamiliesheadedbyapersonaged35to44;mediandebtisalso higherforcouples,homeowners,andfamiliesheadedbyaself-employedpersonoraperson workinginamanagerialorprofessionalposition.Overtherecentthree-yearperiod, changesinthemedianamountof outstandingdebtvariedsubstantiallyacrossdemographicsubgroups.Oneconsistentimpressionfromthedataisamarkedincreaseinthe amountof debtheldbyolderfamilies;mediandebtrosesubstantiallyinpercentageterms forfamiliesheadedbysomeoneaged55orolder—especiallychildlesssinglefamilies
ChangesinU.S.FamilyFinancesfrom2007to2010 85 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys A.2007SurveyofConsumerFinances Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Percentageoffamiliesholdingdebt Allfamilies 48.7 5.5 46.9 46.1 1.7 6.8 77.0 Percentileofincome Lessthan20 14.9 1.1 27.8 25.7 * 3.9 51.7 20–39.9 29.6 1.9 42.4 39.5 1.8 6.8 70.2 40–59.9 50.5 2.6 53.9 54.8 * 6.4 83.8 60–79.9 69.7 6.9 59.2 62.1 2.1 8.7 90.9 80–89.9 80.8 8.5 57.4 55.8 * 9.6 89.6 90–100 76.4 21.9 45.0 40.6 2.1 7.0 87.6 Ageofhead(years) Lessthan35 37.3 3.3 65.2 48.5 2.1 5.9 83.6 35–44 59.5 6.5 56.2 51.7 2.2 7.5 86.2 45–54 65.5 8.0 51.9 53.6 1.9 9.8 86.8 55–64 55.3 7.8 44.6 49.9 1.2 8.7 81.8 65–74 42.9 5.0 26.1 37.0 1.5 4.4 65.5 75ormore 13.9 .6 7.0 18.8 * 1.3 31.4 Familystructure Singlewithchild(ren) 38.3 2.7 50.2 45.3 2.6 10.1 78.0 Single,nochild,ageless than55 35.0 3.5 44.1 42.9 * 7.0 76.9 Single,nochild,age55 ormore 22.0 1.9 18.9 30.2 * 3.7 48.2 Couplewithchild(ren) 69.0 8.4 62.9 54.7 2.0 7.9 91.1 Couple,nochild 51.3 6.6 43.6 46.7 1.5 5.7 76.0 Educationofhead Nohighschooldiploma 26.0 1.9 33.3 26.9 * 5.3 55.5 Highschooldiploma 45.0 3.2 46.0 46.8 1.4 6.4 75.1 Somecollege 46.9 6.4 54.3 51.0 2.2 9.3 80.8 Collegedegree 61.7 8.7 49.1 50.2 1.7 6.5 85.1 headedbysomeoneaged55orolder—andforfamiliesheadedbysomeonewhowas retired.Relativelylargeproportionaldecreasesinthemedianamountof debtwerewidespread.Familiesheadedbyapersonaged45to54sawadecreaseof 8.7percent,families headedbysomeonewhowasself-employedsawan8.2percentdecrease,andcoupleswith childrensawtheirmediandebtfall11.0percent.Debtfell17.8percentamongfamilies headedbyapersonwhoworkedinatechnical,sales,orservicejoband13.0percentamong nonwhiteorHispanicfamilies.Themediandecreased6.6percentintheSouthregionand 7.8percentintheWestregion,thetwoareashardesthitbythelargedeclineinhousevalues. Mortgages and Other Borrowing on the Primary Residence Parallelingthedropinhomeownershipdiscussedearlier,theshareof familieswithdebt securedbyaprimaryresidence(hereafter,home-secureddebt)declinedinthemostrecent period,endingalongupwardtrenddatingbacktoatleastthe1989SCF.44Thefractionof 44 Home-secureddebtconsistsoffirst-lienandjunior-lienmortgagesandhomeequitylinesofcreditsecuredby theprimaryresidence.Forpurposesofthisarticle,first-andjunior-lienmortgagesconsistonlyofclosed-end loans—thatis,loanstypicallywithaone-timeextensionofcredit,asetfrequencyofrepayments,anda requiredrepaymentsizethatmaybefixedorvaryovertimeinaccordancewithapre-specifiedagreementor withchangesinagivenmarketinterestrate.Asatypeofopen-endedcredit,homeequitylinestypicallyallow creditextensionsattheborrower’sdiscretionsubjecttoaprearrangedlimitandallowrepaymentsattheborrower’sdiscretionsubjecttoaprearrangedminimumsizeandfrequency.
86 FederalReserveBulletin|June2012 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys—continued A.2007SurveyofConsumerFinances—continued Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Raceorethnicityofrespondent Whitenon-Hispanic 52.1 5.8 46.1 45.1 1.6 6.7 76.8 NonwhiteorHispanic 40.4 4.8 48.9 48.4 2.0 7.0 77.7 Currentworkstatusofhead Workingforsomeoneelse 56.7 5.4 57.5 53.7 1.9 8.7 86.2 Self-employed 64.8 15.1 43.9 48.9 3.6 4.7 86.8 Retired 27.0 2.6 23.6 28.2 .8 3.2 52.3 Othernotworking 25.5 * 42.9 36.9 * 7.5 69.9 Currentoccupationofhead Managerialorprofessional 67.6 10.0 56.2 52.7 1.8 7.0 90.9 Technical,sales,orservices 49.7 4.5 52.2 53.2 2.7 7.9 81.8 Otheroccupation 53.6 5.1 57.8 53.2 2.1 9.7 84.9 Retiredorothernotworking 26.7 2.5 26.6 29.6 .7 3.9 55.0 Region Northeast 48.4 4.9 40.7 44.3 * 5.6 73.3 Midwest 51.0 5.2 47.9 45.5 1.9 7.0 78.3 South 46.6 4.6 48.5 43.5 1.7 6.9 75.3 West 49.9 8.1 48.4 52.4 2.7 7.5 81.6 Urbanicity Metropolitanstatisticalarea (MSA) 49.7 6.1 46.0 46.3 1.8 6.6 77.4 Non-MSA 43.5 2.9 51.3 44.8 1.6 8.0 75.1 Housingstatus Owner 70.9 6.9 46.1 50.1 1.3 6.8 82.4 Renterorother * 2.6 48.6 37.3 2.8 6.9 65.4 Percentileofnetworth Lessthan25 11.0 * 54.2 41.0 2.6 6.7 68.8 25–49.9 56.2 3.2 52.2 52.9 1.3 8.2 82.5 50–74.9 64.4 4.9 46.2 51.7 1.6 7.4 80.3 75–89.9 63.7 8.5 39.7 44.0 1.5 3.8 76.8 90–100 62.3 21.8 28.2 30.7 1.5 6.8 76.1 familieswithhome-secureddebtfell1.7percentagepoints,slightlyfasterthanthe1.3percentagepointdropinhomeownershipitself.Becausethefractionof familieswithhome-secureddebtfellslightlymorethanhomeownership,thefractionof homeownerswitha mortgagealsofellsomewhat,from70.9percentin2007to69.9percentin2010. Familiesingroupswithhigherlevelsof income,education,orwealtharegenerallymore likelytohavemortgagedebt,asarecouplesandfamiliesheadedbyapersonwhois employedinamanagerialorprofessionaljoborwhoisself-employed.Acrossagegroups, therateof borrowingpeaksamongfamiliesinthe45-to-54agegroupanddeclinessharply amongolderagegroups.45Whitenon-HispanicfamiliesaremorelikelytohavehomesecureddebtthanarenonwhiteorHispanicfamilies.46Between2007and2010,theprevalenceof home-secureddebtfellthemostforfamilieswithhigherlevelsof income,andit alsofellforfamiliesheadedbyapersonwhowasself-employedoremployedinatechnical, sales,orserviceoccupationandforfamiliesheadedbyapersonyoungerthanage75;the 45 Ofthefamiliesthatownedahome,thefractionofhomeownerswithmortgagedebtwashighestamongfamiliesinthetwoyoungestagegroupsin2010—bothover90percent. 46 Thispatternreverses,however,whenconsideringonlyhomeowners;forexample,in2010,68.8percentofwhite non-Hispanichomeownershadamortgage,comparedwith73.3percentofnonwhiteorHispanichomeowners (datanotshowninthetables).
ChangesinU.S.FamilyFinancesfrom2007to2010 87 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys––continued A.2007SurveyofConsumerFinances––continued Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Medianvalueofholdingsforfamiliesholdingdebt(thousandsof2010dollars) Allfamilies 112.1 104.8 13.6 3.1 4.0 5.2 70.6 Percentileofincome Lessthan20 41.9 73.3 6.8 1.0 * 3.1 9.4 20–39.9 53.4 44.0 10.3 1.9 1.4 4.2 18.9 40–59.9 92.9 72.1 13.4 2.5 * 4.2 57.1 60–79.9 120.5 87.0 17.1 4.2 5.4 5.6 116.7 80–89.9 171.8 131.0 18.1 5.8 * 5.2 190.9 90–100 210.6 154.5 19.2 7.9 18.2 7.9 246.2 Ageofhead(years) Lessthan35 141.8 81.7 15.7 1.9 1.0 4.7 37.9 35–44 134.1 106.4 14.2 3.7 4.8 5.2 111.2 45–54 115.2 85.9 13.5 3.8 6.3 4.7 100.5 55–64 89.1 136.2 11.4 3.8 10.5 6.3 63.2 65–74 72.3 131.0 10.8 3.1 31.4 5.2 42.0 75ormore 41.9 52.4 8.4 .8 * 4.7 13.6 Familystructure Singlewithchild(ren) 97.4 89.1 10.3 1.6 2.6 5.2 31.1 Single,nochild,ageless than55 102.7 82.2 10.5 2.0 * 3.1 32.5 Single,nochild,age55 ormore 53.4 141.4 6.9 2.4 * 4.2 15.9 Couplewithchild(ren) 136.2 97.4 15.6 4.2 5.2 5.6 126.8 Couple,nochild 102.7 131.0 16.3 3.5 4.0 5.2 74.2 Educationofhead Nohighschooldiploma 52.4 55.8 9.2 1.6 * 4.2 20.4 Highschooldiploma 88.0 85.9 10.7 2.4 1.4 4.7 41.9 Somecollege 101.6 83.8 12.6 3.0 4.0 5.2 57.0 Collegedegree 149.5 131.0 18.2 4.2 6.3 6.3 130.3 Note:Seenotetotable1. *Tenorfewerobservations. proportionof familieswithhome-secureddebtincreasedfortheoldestagegroupandfor childlesssinglefamiliesheadedbysomeoneaged55orolder. Overall,themedianamountof home-secureddebtfell2.2percentfrom2007to2010,and themeanfell1.2percent;thesedecreasesreverselong-termtrends,asboththemedianand meanhadrisennearly50percentinthedecadeprecedingthemostrecentperiod. Amongfamilieswithhome-secureddebt,medianhomeequity(thedifferencebetweenthe valueof ahomeandanydebtssecuredagainstit)fellfrom$95,300in2007to$55,000in 2010,a42.3percentdecrease(datanotshowninthetables).47Amongthosewithsuchdebt, themedianratioof home-secureddebttothevalueof theprimaryresidencerose11.3percentagepoints,to64.6percentin2010.Overtherecentthree-yearperiod,anSCF-based estimateof theaggregateratioof home-secureddebttohomevaluesforallhomeownersjumpedto41.3percent;thatratiowas34.9percentin2007.Atthetimeof the 2010SCFinterview,8.1percentof allhomeownershadhome-secureddebtgreaterthanthe 47 Amongallhomeownersin2010,medianhomeequitywas$75,000;in2007,ithadbeen$110,000.
88 FederalReserveBulletin|June2012 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys––continued A.2007SurveyofConsumerFinances––continued Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Raceorethnicityofrespondent Whitenon-Hispanic 111.1 95.2 14.0 3.5 5.2 5.2 80.1 NonwhiteorHispanic 118.4 120.2 12.6 2.1 .8 5.2 46.0 Currentworkstatusofhead Workingforsomeoneelse 122.6 93.2 14.2 3.1 3.0 5.2 86.0 Self-employed 141.4 158.8 16.2 4.5 5.2 10.5 128.5 Retired 49.3 104.8 9.1 1.6 6.7 4.7 21.0 Othernotworking 94.3 * 11.2 1.9 * 8.4 22.9 Currentoccupationofhead Managerialorprofessional 155.1 136.2 17.1 4.7 9.4 7.3 144.1 Technical,sales,orservices 105.7 110.0 12.8 3.1 3.7 4.2 69.0 Otheroccupation 98.5 62.9 12.6 2.6 4.2 5.0 67.2 Retiredorothernotworking 55.5 104.8 10.2 1.6 6.7 5.2 21.0 Region Northeast 112.1 99.5 12.6 3.1 * 6.8 69.8 Midwest 98.4 86.5 11.5 3.1 5.2 5.2 64.1 South 103.7 83.8 13.8 2.9 3.3 4.7 63.8 West 157.9 167.6 14.9 3.2 4.0 6.3 100.1 Urbanicity Metropolitanstatisticalarea (MSA) 123.8 105.8 13.9 3.1 3.7 5.2 81.8 Non-MSA 63.5 73.3 12.2 2.1 6.3 5.2 31.2 Housingstatus Owner 112.1 104.8 14.8 3.8 7.9 5.2 116.4 Renterorother * 83.8 10.8 1.4 1.0 5.2 9.6 Percentileofnetworth Lessthan25 112.1 * 11.9 1.6 1.0 5.2 12.4 25–49.9 88.2 77.5 13.6 2.9 2.1 4.1 67.3 50–74.9 109.0 75.4 14.6 3.8 4.4 5.2 102.9 75–89.9 134.1 98.5 12.6 4.2 10.7 5.2 133.0 90–100 188.6 167.6 17.9 5.2 45.1 15.7 215.2 MEMO Meanvalueofholdingsfor familiesholdingdebt 156.1 185.7 22.0 7.7 26.0 16.2 132.0 reportedvalueof theirprimaryresidence;amongthegroupwithhome-secureddebt,the figurewas11.6percent. Mortgageinterestratesfelldramaticallyoverthe2007–10periodtoalevelwellbelowprevailingratesinthe1990s,approachinghistoricallows.Lowinterestratesandthedeductibilityof interestpaymentsonmortgagedebtprovideanincentiveforfamiliestoborrowagainsttheequityintheirhome,butthedecreaseinhomevaluesandtighterlending standardsfollowingthefinancialcrisisworkedagainsttheincentive.Borrowingagainst homeequitymaytaketheformof refinancinganexistingfirst-lienmortgageformorethan theoutstandingbalance,obtainingajunior-lienmortgage,oraccessingahomeequityline of credit.Thesurveyprovidesdetailedinformationonallof theseoptionsforhomeequity borrowing.Theshareof homeownerswhohadafirstlienincreasedslightly—0.3percentagepoint—to66.4percentin2010(table14).Thefractionof homeownerswithajuniorlienmortgagefell2.7percentagepoints—to5.8percentin2010,alevellowerthananyseen intheSCFsinceatleastthe1989survey.Theproportionof homeownerswhohadahome equitylineof creditdecreased3.1percentagepoints,to15.3percentin2010,andtheshare of homeownerswithanoutstandingbalancefell2.3percentagepointsto10.3percent;the
ChangesinU.S.FamilyFinancesfrom2007to2010 89 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys––continued B.2010SurveyofConsumerFinances Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Percentageoffamiliesholdingdebt Allfamilies 47.0 5.3 46.3 39.4 2.1 6.4 74.9 Percentileofincome Lessthan20 14.8 1.3 34.1 23.2 1.2 4.2 52.5 20–39.9 29.6 1.7 40.8 33.4 2.2 4.2 66.8 40–59.9 51.6 3.5 49.9 45.0 2.1 6.8 81.8 60–79.9 65.4 6.0 56.6 53.1 1.9 7.8 86.9 80–89.9 74.5 9.1 58.8 51.0 2.0 11.8 88.9 90–100 72.8 19.4 41.8 33.6 3.7 6.6 84.5 Ageofhead(years) Lessthan35 34.0 2.9 61.9 38.7 1.8 5.5 77.8 35–44 57.6 5.1 60.0 45.6 2.2 8.6 86.0 45–54 60.4 7.6 49.8 46.2 2.7 9.7 84.1 55–64 53.6 7.6 40.7 41.3 3.0 6.7 77.7 65–74 40.5 5.0 30.4 31.9 1.2 2.3 65.2 75ormore 24.2 2.9 12.3 21.7 * 2.0 38.5 Familystructure Singlewithchild(ren) 36.0 2.6 49.4 35.3 1.2 6.7 73.5 Single,nochild,ageless than55 31.8 2.7 48.0 37.2 2.3 5.7 73.3 Single,nochild,age55 ormore 29.0 3.2 20.4 26.9 1.0 2.5 52.2 Couplewithchild(ren) 64.9 7.3 59.6 47.4 2.8 8.8 87.5 Couple,nochild 49.5 6.9 43.0 40.1 2.1 6.2 74.5 Educationofhead Nohighschooldiploma 27.2 * 34.7 27.7 1.6 4.8 56.4 Highschooldiploma 42.0 2.8 44.0 36.9 1.7 6.4 70.6 Somecollege 44.8 4.7 55.1 45.8 2.3 7.4 80.2 Collegedegree 58.7 9.2 47.7 42.1 2.4 6.4 82.0 medianamountborrowedagainstsuchlinesrosefrom$25,100in2007to$26,400in 2010(datanotshowninthetables).48Overall,theshareof totalhome-secureddebtthat wasattributabletooutstandingbalancesonfirstliensandhomeequitylinesof creditrose acrossthe2007and2010surveys.Theshareof home-secureddebtattributabletofirstliens increased0.8percentagepointto92.1percentin2010,andtheshareattributabletohome equitylinesof creditincreased0.6percentagepointto5.4percentin2010.Theremainingshare,whichisaccountedforbyjuniorliens,decreased1.4percentagepoints,to 2.6percent,inthemostrecentperiod(datanotshowninthetables). In2010,therewasareversalof thepreviouslyincreasingtrendintheshareof theamount of allfirstliensthatwasattributabletorefinancedmortgagesorwhereadditionalborrowinghadoccurred.Firstliensthathadnotbeenrefinancedheldsteadyat30.5percentof all homeowners,whiletheshareof homeownerswithoutadditionalborrowingfell(table14). Amongfamiliesin2010thathadborrowedadditionalamountsatthetimeof theirmost recentrefinancing,themedianadditionalamountborrowedwas$30,000,comparedwith $30,300in2007(datanotshowninthetables).Inthe2010survey,themostcommonuseof suchadditionalborrowingwasforhomeimprovementorsomeothertypeof realestate 48 Ofallfamilies,44.7percenthadafirst-lienmortgagein2010(45.4percentin2007),3.9percenthadajuniorlienmortgage(5.8percentin2007),10.3percenthadahomeequitylineofcredit(12.6percentin2007),and 7.2percenthadahomeequitylineofcreditwithanoutstandingbalance(8.5percentin2007).
90 FederalReserveBulletin|June2012 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys––continued B.2010SurveyofConsumerFinances—continued Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Raceorethnicityofrespondent Whitenon-Hispanic 51.8 6.1 45.8 39.3 2.4 6.1 75.9 NonwhiteorHispanic 37.1 3.8 47.4 39.7 1.4 7.2 73.0 Currentworkstatusofhead Workingforsomeoneelse 54.4 5.3 56.0 45.8 2.4 7.7 83.9 Self-employed 58.6 12.4 42.4 40.4 3.2 7.0 82.0 Retired 29.1 2.9 24.6 25.4 .9 3.1 51.0 Othernotworking 31.1 2.8 51.8 35.5 * 6.6 75.1 Currentoccupationofhead Managerialorprofessional 64.6 9.8 51.4 44.6 2.9 6.5 87.4 Technical,sales,orservices 43.8 4.1 55.0 44.6 2.4 7.0 79.6 Otheroccupation 54.1 4.4 55.6 45.7 2.1 9.9 82.7 Retiredorothernotworking 29.5 2.9 30.5 27.6 1.1 3.9 56.2 Region Northeast 46.9 5.5 42.6 39.9 1.6 6.6 74.8 Midwest 52.8 4.2 48.5 37.4 2.3 5.4 76.4 South 43.6 4.8 48.2 38.2 2.0 7.3 73.6 West 46.9 7.3 44.2 43.0 2.4 5.9 75.9 Urbanicity Metropolitanstatisticalarea (MSA) 47.8 5.7 46.2 40.3 2.1 6.5 75.8 Non-MSA 43.3 3.7 46.9 35.0 1.9 6.3 70.7 Housingstatus Owner 69.9 6.9 46.1 43.1 2.0 6.5 81.4 Renterorother * 2.2 46.9 31.8 2.1 6.4 61.6 Percentileofnetworth Lessthan25 20.0 1.8 57.1 36.9 2.3 6.6 69.2 25–49.9 48.9 2.0 51.1 44.5 1.5 7.3 78.8 50–74.9 61.5 4.6 47.7 46.2 2.2 6.7 80.3 75–89.9 56.9 9.7 34.4 36.1 1.8 5.4 72.2 90–100 58.6 17.8 21.9 20.9 3.0 4.5 70.4 investment;together,thoseaccountedforabouthalf of equityextracted.Othernotable usesforextractedequityincludeloanconsolidation,businessinvestment,vehiclepurchase, andeducationexpenses. Familiesheadedbyaself-employedpersonweremorelikelythanfamiliesoveralltohavea homeequitylineof credit—18.8percentof self-employedfamilies,comparedwith 10.3percentoverallin2010—andtobeborrowingagainstsuchaline—13.1percentof selfemployedfamilies,comparedwith7.2percentforallfamiliesin2010(datanotshownin thetables).Thesedifferencesreflect,inpart,therelativelyhigherratesof homeownership amongfamiliesheadedbyaself-employedperson. Amidrisinghousepricesinthedecadebefore2007,muchdiscussionfocusedonhowfamiliesmanagedtofinancethepurchaseof ahome.Eventhoughhousepricedeclinesafter 2007benefitedfirst-timehomebuyers,existinghomeownerswereconfrontedwiththe necessityof servicingmortgagebalancesaccumulatedearlier.Oneimportantdeterminant of thesizeof theregularpaymentthatfamiliesmustmaketoservicetheirmortgagesisthe lengthof timeoverwhichtheloanmustberepaid.Between2007and2010,theshareof fixed-termfirst-lienmortgageswithatermof atleast30yearsrosedramatically,continuing atrendobservedinthepriorsurvey.Theshareof fixed-termfirst-lienmortgageswitha
ChangesinU.S.FamilyFinancesfrom2007to2010 91 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys––continued B.2010SurveyofConsumerFinances––continued Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Medianvalueofholdingsforfamiliesholdingdebt(thousandsof2010dollars) Allfamilies 109.6 98.0 12.6 2.6 6.0 4.5 70.7 Percentileofincome Lessthan20 54.6 72.0 7.6 1.0 1.0 2.0 10.1 20–39.9 65.5 60.0 8.4 1.5 2.7 2.0 20.2 40–59.9 90.0 62.5 12.0 2.2 5.0 3.5 61.4 60–79.9 116.6 66.9 15.0 3.1 3.2 6.0 106.6 80–89.9 158.0 88.0 19.0 5.9 14.5 5.0 163.8 90–100 241.0 180.0 22.4 8.0 20.0 18.0 267.2 Ageofhead(years) Lessthan35 120.0 89.0 14.0 1.6 2.0 2.0 39.6 35–44 139.9 85.0 14.7 3.5 2.5 4.4 108.0 45–54 114.0 115.0 12.0 3.5 6.0 5.0 91.8 55–64 97.0 98.0 11.3 2.8 11.0 6.0 76.9 65–74 70.0 125.0 10.0 2.2 8.1 6.0 45.0 75ormore 52.0 74.8 7.8 1.8 * 13.0 30.0 Familystructure Singlewithchild(ren) 96.0 95.0 9.9 2.0 8.1 2.8 30.2 Single,nochild,ageless than55 110.0 99.0 11.8 1.6 3.0 5.0 34.8 Single,nochild,age55 ormore 64.0 72.0 7.6 1.7 3.3 2.1 28.0 Couplewithchild(ren) 132.0 106.3 15.0 3.4 6.0 4.2 112.8 Couple,nochild 101.0 97.0 13.2 3.0 13.0 5.8 72.5 Educationofhead Nohighschooldiploma 60.0 * 7.6 1.4 .6 2.3 17.6 Highschooldiploma 83.0 62.5 10.0 2.1 3.2 3.0 42.8 Somecollege 106.0 61.3 12.1 2.1 2.7 3.0 59.7 Collegedegree 150.0 125.0 18.0 4.0 13.0 9.0 127.0 Note:Seenotetotable1. *Tenorfewerobservations. termof 30yearsorlongerrose5.6percentagepoints,to70.6percentin2010.Offsetting thatincrease,theshareof fixed-termfirst-lienmortgageswithatermof 15yearsorshorter fell4.4percentagepointsto21.1percentin2010,andthesharewithtermsbetween16and 29yearsfell1.1percentagepointsto8.3percentin2010(datanotshowninthetables). Thelevelof interestratesisalsoakeydeterminantof thesizeof theregularpaymentthata borrowermustmaketorepayaloan.Between2007and2010,themedianinterestrateon thestockof outstandingfirst-lienmortgagesonprimaryresidencesfell0.50percentage pointto5.50percent,andthemeaninterestratefell0.6percentagepointto5.71percent (datanotshowninthetables).Somemortgageshaveaninterestratethatmayriseor fallovertime.From2007,thefractionof first-lienmortgagesontheprimaryresidencethat hadapotentiallyvariableratefell3.6percentagepoints,to10.6percentin2010. Anotherfactorthatmayaffectaborrower’sabilitytoservicealoanistheextenttowhich thepaymentmaychangeoverthelifeof theloanforreasonsotherthanachangeinthe interestrate.Recentdeclinesinhousepricesandchangesinbenchmarkinterestrateshave broughtparticularattentiontomortgageswithpaymentsthatmayvaryoverthelifeof the loan.Insomecases,amortgagemaybestructuredsothattheregularpaymentsarenotsufficienttopaybacktheentireprincipaloverthecontractperiodof theloan;insuchcases,a
92 FederalReserveBulletin|June2012 Table13.Familyholdingsofdebt,byselectedcharacteristicsoffamiliesandtypeofdebt,2007and 2010surveys––continued B.2010SurveyofConsumerFinances––continued Securedbyresidentialproperty Linesofcredit Installment Creditcard notsecuredby Familycharacteristic Other Anydebt Primary loans balances residential residence Other property Raceorethnicityofrespondent Whitenon-Hispanic 112.0 110.0 13.6 3.1 6.0 5.2 85.0 NonwhiteorHispanic 100.0 80.0 10.7 1.9 5.5 2.7 40.0 Currentworkstatusofhead Workingforsomeoneelse 116.0 92.0 13.9 3.0 6.0 4.0 85.0 Self-employed 145.0 140.0 15.3 4.0 15.6 10.0 118.0 Retired 60.8 62.0 8.1 2.0 3.3 3.0 30.0 Othernotworking 92.7 94.0 8.3 1.5 * 5.0 21.1 Currentoccupationofhead Managerialorprofessional 150.0 140.0 17.0 4.0 10.0 6.0 137.0 Technical,sales,orservices 110.0 86.3 12.8 2.3 2.0 3.8 56.7 Otheroccupation 90.0 52.0 11.1 2.6 5.6 4.0 63.5 Retiredorothernotworking 68.0 72.0 8.1 1.8 3.0 4.0 28.2 Region Northeast 114.0 118.8 13.7 2.3 6.0 6.0 73.0 Midwest 95.0 85.0 13.1 2.5 3.0 4.0 70.5 South 95.0 88.0 11.3 2.8 8.1 3.4 59.6 West 157.6 125.0 14.4 3.0 6.0 5.0 92.3 Urbanicity Metropolitanstatisticalarea (MSA) 119.0 104.0 12.9 2.8 5.0 5.0 80.2 Non-MSA 64.0 62.5 12.0 2.1 14.5 3.0 40.0 Housingstatus Owner 109.6 97.0 13.7 3.4 10.0 5.2 110.8 Renterorother * 105.4 10.2 1.3 1.5 2.7 9.6 Percentileofnetworth Lessthan25 141.0 110.0 13.5 1.9 1.9 2.5 20.4 25–49.9 91.0 25.6 10.5 2.0 1.3 2.5 55.3 50–74.9 100.3 53.2 12.7 3.1 5.0 6.0 85.9 75–89.9 105.0 92.0 13.5 3.4 11.0 10.0 100.7 90–100 216.5 195.0 17.7 5.0 30.0 25.0 232.8 MEMO Meanvalueofholdingsfor familiesholdingdebt 154.3 179.6 23.5 7.1 49.1 16.8 130.7 “balloonpayment”of theremainingprincipalisleftattheendof theloanterm.Overthe 2007–10period,theshareof first-lienmortgageswithaballoonpaymentfell1.3percentage Table14.Typeofhome-secureddebtheldbyhomeowners,2001–10surveys Percent Homeownerswithhome-secureddebt Typeofhome-secureddebt 2001 2004 2007 2010 First-lienmortgage 62.5 65.2 66.1 66.4 Forhomepurchase 35.8 28.2 30.4 30.5 Refinanced Extractedequity 9.7 12.9 14.3 11.4 Noextractedequity 17.1 24.0 21.5 24.5 Junior-lienmortgage 8.5 6.1 8.5 5.8 Forhomepurchase 1.3 1.5 2.1 1.7 Otherpurpose 7.2 4.7 6.4 4.0 Homeequitylineofcredit 11.2 17.8 18.4 15.3 Currentlyborrowing 7.1 12.4 12.4 10.7
ChangesinU.S.FamilyFinancesfrom2007to2010 93 pointsto3.2percent.Paymentsonamortgagemayvaryinavarietyof otherways,but suchloanstendtoberarelyfoundintheSCF. Borrowing on Other Residential Real Estate Althoughownershipof residentialrealestateotherthanaprimaryresidenceroseslightly from2007to2010,theprevalenceof debtowedonsuchpropertyedgeddown0.2percentagepointoverthattime—to5.3percentof familiesin2010.Amongfamiliesthathadsuch realestatein2007,40.3percenthadaloansecuredbytheproperty;in2010,theproportion hadfallento37.2percent.Borrowingonotherresidentialrealestateismorecommon amongfamiliesinhigherincome,education,orwealthgroups;couples;andfamilies headedbyaself-employedpersonorbyapersonemployedinamanagerialorprofessional position.Mostof thechangesintheprevalenceof suchdebtacrossgroupsweresmall, thoughthereweresubstantialdecreasesforthehighestincomeandwealthdecilesandthe self-employed. Themedianamountof debtonotherresidentialrealestateforfamilieshavingsuchdebt fell6.5percentin2010,andthemeanamountfell4.2percent.Changesovertherecent three-yearperiodinthemedianandmeanamountsexhibitedamixedpatternof increases anddecreasesforsubgroupsof families,andthepercentagechangeswerequitelargein absolutevalue. Installment Borrowing Installmentborrowingisaboutascommonashome-securedborrowing.49In2010, 46.3percentof familieshadinstallmentdebt,adecreaseof 0.6percentagepointfromthe levelin2007.Theuseof installmentborrowingisbroadlydistributedacrossdemographic groups,withnotablylowerusebyfamiliesinthelowestincomegroup,thoseinthehighest wealthgroup,childlesssinglefamiliesheadedbyapersonaged55orolder,familiesheaded byaretiredperson,andfamiliesheadedbyapersonaged65orolder.Bycomparison,the medianamountof outstandinginstallmentdebt,forfamilieshavingsuchdebt,variesmore clearlyacrossmanygroups.Themedianamounttendstoriseacrossincomeandeducation, anditfallsacrossagegroups.Themedianamountof installmentdebtisfairlysimilar amongfamiliesinwealthgroupsbelowthe90thpercentileandsomewhathigherforfamiliesinthetopnetworthgroup. Installmentborrowingisusedforawidevarietyof purposes.In2010,45.1percentof such borrowingwasrelatedtoeducation,39.3percentwasrelatedtothepurchaseof avehicle, and15.6percentof outstandinginstallmentdebtwasowedforotherpurposes(table15).In pastSCFsurveys,balancesonvehicleloanshavealwaysaccountedformorethanhalf of installmentdebt;thedecreasetoashareof 39.3percentin2010reflects,inpart,adecrease invehiclepurchasesintheyearsprecedingthemostrecentsurvey.Acontributingfactorin thedeclineof thatsharewasanincreaseinborrowingforeducation,whichrose11.9percentagepointsasashareof installmentborrowingovertherecentthree-yearperiod.The increasedimportanceof education-relatedinstallmentdebtismostevidentfortheyoungest agegroup;amongfamiliesheadedbysomeonelessthanage35,65.6percentof their installmentdebtwaseducationrelatedin2010,upfrom53.1percentin2007.Amongfamiliesheadedbysomeonereportingeducationalattainmentof “somecollege,”theshareof 49 Theterm“installmentborrowing”inthisarticledescribesclosed-endconsumerloans—thatis,loansthattypicallyhavefixedpaymentsandafixedterm.Examplesareautomobileloans,studentloans,andloansforfurniture,appliances,andotherdurablegoods.
94 FederalReserveBulletin|June2012 Table15.Valueofinstallmentdebtdistributedbytypeofinstallmentdebt,byselectedcharacteristicsof familieswithinstallmentdebt,2007and2010surveys Percent 2007 2010 Familycharacteristic Education Vehicle Other Education Vehicle Other Allfamilies 33.2 51.7 15.1 45.1 39.3 15.6 Percentileofincome Lessthan20 47.0 24.4 28.6 40.6 29.1 30.3 20–39.9 29.8 43.9 26.3 44.2 32.2 23.6 40–59.9 33.6 54.7 11.7 54.0 34.3 11.7 60–79.9 32.7 59.4 7.9 42.6 46.7 10.7 80–89.9 38.3 56.2 5.6 50.7 44.6 4.7 90–100 25.5 50.9 23.6 37.3 43.7 19.0 Ageofhead(years) Lessthan35 53.1 41.2 5.6 65.6 25.7 8.7 35–44 24.3 57.8 17.8 48.1 37.5 14.4 45–54 27.2 53.5 19.4 36.1 51.3 12.6 55–64 21.7 53.8 24.5 29.9 42.9 27.2 65–74 * 73.2 19.0 13.3 63.7 23.0 75ormore * 88.0 * * 38.8 52.0 Educationofhead Nohighschooldiploma 12.8 71.5 15.8 12.3 59.4 28.3 Highschooldiploma 15.0 69.6 15.4 22.8 53.6 23.6 Somecollege 23.6 53.0 23.5 49.4 39.1 11.5 Collegedegree 48.1 40.2 11.7 54.8 32.3 12.9 Raceorethnicityofrespondent Whitenon-Hispanic 32.1 52.1 15.9 43.9 40.0 16.1 NonwhiteorHispanic 36.2 50.6 13.2 47.6 37.7 14.7 Percentileofnetworth Lessthan25 47.9 32.5 19.6 65.4 16.3 18.3 25–49.9 30.4 60.8 8.7 41.0 47.2 11.8 50–74.9 30.1 60.5 9.4 34.0 56.4 9.6 75–89.9 25.9 65.8 8.3 31.1 58.7 10.2 90–100 16.7 47.7 35.7 11.3 60.0 28.7 Note:Seenotetotable1. *Tenorfewerobservations. installmentdebtattributabletoeducation-relatedloansmorethandoubled,from23.6percentin2007to49.4percentin2010.50 From2007to2010,themedianamountowedoninstallmentloansfell7.4percent,while themeanrose7.3percent.Changesinthemedianwithindemographiccategoriesinclude bothincreasesanddecreases.Largedecreasesinthemediandebtoutstandingoccurred amongnonwhiteorHispanicfamilies(a15.1percentdecrease)andamongfamiliesheaded bysomeonewholackedahighschooldiploma(a17.4percentdecrease). Credit Card Balances and Other Lines of Credit Aswithinstallmentborrowing,thecarryingof creditcardbalancesiswidespread,butitis considerablylesscommonamongthehighestandlowestincomegroups,thehighestwealth group,andfamiliesheadedbyapersonwhoisaged65orolderorwhoisretired.51The 50 Foranexpandedversionoftable13,includingthecategoriesofinstallmentloansgivenintable15,see www.federalreserve.gov/econresdata/scf/scf_2010.htm. 51 Inthisarticle,creditcardbalancesconsistofbalancesonbank-typecards(suchasVisa,MasterCard,andDiscoveraswellasOptimaandotherAmericanExpresscardsthatroutinelyallowcarryingabalance),storecards
ChangesinU.S.FamilyFinancesfrom2007to2010 95 proportionof familiescarryingabalance,39.4percentin2010,wasdown6.7percentage pointsfrom2007.Thedecreasedprevalenceof creditcarddebtoutstandingwaswidespreadandnoticeableacrossmostof thedemographicgroups,thoughtheprevalenceof creditcarddebtroseforfamiliesheadedbysomeoneaged75orolderandamongfamilies headedbysomeonewithnohighschooldiploma. Overall,themedianbalanceforthosecarryingabalancefell16.1percentto$2,600;the meanfell7.8percentto$7,100.Thesedecreasesreversedsomeof theprecedingrun-upin creditcarddebt(datanotshowninthetables).Overtherecentthree-yearperiod,the medianbalancefellformostdemographicgroups;couplesandchildlesssinglefamilies, higher-wealthfamilies,andfamiliesheadedbysomeoneworkingintechnical,sales,orservicejobsandmanagerialorprofessionaloccupationsallsawsubstantialdecreasesintheir mediancreditcardbalances.Onegroupthatsawsubstantialincreasesintheuseof credit cardborrowingisfamiliesheadedbysomeone75orolder;medianbalancesalsorosefor singlefamilieswithchildrenandforfamiliesinthebottomwealthquartile. Manyfamilieswithcreditcardsdonotcarryabalance.52Of the68.0percentof families withcreditcardsin2010,only55.1percenthadabalanceatthetimeof theinterview;in 2007,72.9percenthadcards,and61.0percentof thesefamilieshadanoutstandingbalance onthem.Thenumberof creditcardsheldbyfamiliesalsodecreased.In2007,35.0percent of familiesheldfourormorecards,andthatlevelof ownershipfellto32.7percentby2010. Between2007and2010,thefractionof familieswiththreecardsfellfrom12.1percentto 10.6percent,thefractionwithtwocardsfellfrom12.7percentto12.2percent,andthe fractionwithonecardfellfrom13.1percentto12.5percent(datanotshowninthetables). Theproportionof cardholderswhohadbank-typecardsdecreasedslightlyoverthisthreeyearperiod,andtheproportionwithstoreorgasolinecardtypesfellconsiderably,while theproportionwithtravelandentertainmentcardtypesaswellasmiscellaneousother creditcardsincreased,asshowninthefollowingtable: Table15.1 Familieswithcreditcards Typeofcreditcard 2010 Change,2007–10 (percent) (percentagepoints) Bank 95.8 –.5 Storeorgasoline 55.8 –4.4 Travelandentertainment 9.3 1.9 Miscellaneous 5.1 1.4 Bank-typecardsarethemostwidelyheldtypeof cardandthusholdparticularimportance inanyexaminationof familyfinances.Indeed,balancesonsuchcardsaccountedfor 85.1percentof outstandingcreditcardbalancesin2010,downfrom87.1percentin2007 (datanotshowninthetables).Theproportionof holdersof bank-typecardswhohada balancewentdown5.9percentagepointsto52.4percent;theproportionof holdersof orchargeaccounts,gasolinecompanycards,so-calledtravelandentertainmentcards(suchasAmerican ExpresscardsthatdonotroutinelyallowcarryingabalanceandDinersClub),othercreditcards,andrevolving storeaccountsthatarenottiedtoacreditcard.Balancesexcludepurchasesmadeafterthemostrecentbillwas paid. 52 Theremainingdiscussionofcreditcardsexcludesrevolvingstoreaccountsthatarenottiedtoacreditcard.In 2010,5.1percent(5.4percentin2007)offamilieshadsuchanaccount,themedianoutstandingbalancefor familiesthathadabalancewas$750($730in2007),andthetotalofsuchbalancesaccountedfor3.5percent (4.4percentin2007)ofthetotalofbalancesoncreditcardsandsuchstoreaccounts(datanotshowninthe tables).
96 FederalReserveBulletin|June2012 bank-typecardswhoreportedthattheyusuallypaytheirbalancesinfullroseslightly,from 55.3percentin2007to56.4percentin2010.Overtherecentthree-yearperiod,themedian newchargesforthemonthprecedingtheinterviewonallbank-typecardsheldbythe familyrosefrom$260in2007to$300in2010.Forfamilieshavinganybank-typecards,the mediannumberof suchcardsremainedat2;themediancreditlimitonallsuchcardsfell from$18,900to$15,000,andthemedianinterestrateonthecardwiththelargestbalance (oronthenewestcard,if nooutstandingbalancesexisted)rose0.5percentagepointto 13.0percent. Only4.1percentof familieshadanestablishedlineof creditotherthanahomeequityline in2010.53Evenfewerfamilies—2.1percent—hadabalanceonsuchaline,anincreaseof 0.4percentagepointsince2007.Themedianamountoutstandingontheselinesrose 50.0percentbetweenthemostrecentsurveys,andthemeanroseevenmore—71.9percent—between2007and2010.Borrowingonotherlinesof creditwasmorecommon amongfamiliesheadedbyapersonwhowasself-employedorfamiliesinthehighest incomeorwealthgroups,apatternthatisalsoapparentinearlierSCFs. Other Debt From2007to2010,theproportionof familiesthatowedmoneyonothertypesof debts decreased0.4percentagepointto6.4percent.54Borrowingagainstpensionaccountsrose slightlyoverthisperiod,whileusesof othertypesdeclined,asshowninthefollowingtable: Table15.2 Allfamilies Typeofotherdebt 2010 Change,2007–10 (percent) (percentagepoints) Cashvaluelifeinsuranceloans .9 † Pensionaccountloans 3.6 .4 Marginaccountloans .3 –.2 Othermiscellaneousloans 1.9 –.5 †Lessthan0.05percent. Ratesof useof otherdebtarenoticeablylowerforfamiliesinthebottomtwoincome groupsaswellasforfamiliesheadedbyapersonwhois65yearsof ageorolderorwhois retired.Thehighestrateof otherdebtownershipisamongthegroupsof familieswithchildren.Changesintheprevalenceof suchdebtvariedwidelyacrossdemographicgroups, thoughmostgroupssawdeclines. Themedianamountowedbyfamilieswiththistypeof debtfell13.5percentto$4,500 between2007and2010;overthesameperiod,themeanrose6.8percent.In2010,40.2percentof thetotalamountof thistypeof debtoutstandingwasattributabletomarginloans (36.3percentin2007),26.4percenttoloansagainstapensionfromacurrentjobof the familyheadorthatperson’sspouseorpartner(20.5percentin2007),8.0percenttoloans againstcashvaluelifeinsurancepolicies(12.0percentin2007),andtheremaining25.4percenttomiscellaneousloans(31.2percentin2007)(datanotshowninthetables). 53 Inthisarticle,borrowingonlinesofcreditexcludesborrowingoncreditcards. 54 The“otherdebt”categorycomprisesloansoncashvaluelifeinsurancepolicies,loansagainstpensionaccounts, borrowingonmarginaccounts,andamiscellaneouscategorylargelycomprisingpersonalloansnotexplicitly categorizedelsewhere.
ChangesinU.S.FamilyFinancesfrom2007to2010 97 Table16.Amountofdebtofallfamilies,distributedbypurposeofdebt,2001–10surveys Percent Purposeofdebt 2001 2004 2007 2010 Primaryresidence Purchase 70.9 70.2 69.5 69.5 Improvement 2.0 1.9 2.3 1.9 Otherresidentialproperty 6.5 9.5 10.8 10.5 Investmentsexcludingrealestate 2.8 2.2 1.6 2.0 Vehicles 7.8 6.7 5.5 4.7 Goodsandservices 5.8 6.0 6.2 5.7 Education 3.1 3.0 3.6 5.2 Other 1.1 .6 .5 .4 Total 100 100 100 100 Note:Seenotetotable1. In2007,theSCFcollectedinformationforthefirsttimeonwhetherafamilymemberhad takenoutaloaninthepastyearthatwassupposedtoberepaidinfulloutof thatperson’s nextpaycheck.55Overall,3.9percentof familiesreportedhavingtakenoutaso-called paydayloanin2010,upfrom2.4percentin2007.In2010,thefractionof familiesthathad takenoutapaydayloandeclinedoveragegroups,fallingfrom5.7percentof families headedbyapersonyoungerthanage35to0.5percentforfamiliesheadedbyaperson aged65orolder(datanotshowninthetables).Acrossincomegroups,theshareof families thatreportedsuchaloanwasbetween4.6percentand6.2percentforthebottomthree quintiles,butforfamiliesinthetopquintile,theratewasonly0.2percent.Similarly, 8.1percentof familiesinthebottomnetworthquartilereportedhavingtakenoutapayday loan,andvirtuallynofamilieswithnetworthabovethemedianreportedhavingdoneso. Thedataindicatethatfamiliestendtotakeoutpaydayloanstofinanceimmediate expenses.In2010,themostcommonreasongivenforchoosingapaydayloanforfamilies thathadtakenoutsuchaloanwas“emergencies”andsimilarurgentneedsoralackof otheroptions(42.4percent).56Thesecondmostcommonreasoncitedwas“convenience” inobtainingtheloan(24.2percent).Manyfamiliesalsocitedreasonsthatconveyeddifficultiesinmeetingtheirregularfinancialcommitments;forexample,17.4percentof familiesreportedaneedtopayotherbillsandloans(upfrom10.8percentin2007),and 11.0percentcitedtheneedtopayforlivingexpenses,includingfood,gas,vehicleexpenses, medicalpayments,utilitycosts,orrent.Theremaining5.0percentof familieswithapaydayloaninthepastyearcitedotherneeds,including“Christmas”ortheneedto“help family.” Reasons for Borrowing TheSCFprovidesinformationonthereasonsthatfamiliesborrowmoney(table16).One subtleproblemwiththeuseof thesedataisthat,eventhoughmoneyisborrowedforaparticularpurpose,itmaybeemployedtooffsetsomeotheruseof funds.Forexample,afamilymayhavesufficientfundstopurchaseahomewithoutusingamortgagebutmayinstead choosetofinancethepurchasetofreeexistingfundsforanotherpurpose.Thus,trendsin thedatacanonlysuggesttheunderlyinguseof fundsbyfamilies. 55 Thefamilymayormaynothavehadsuchaloanoutstandingatthetimeoftheinterview. 56 Thisdiscussionconsiderstheprimaryreasonsgivenbyfamilieswhenaskedwhytheychosethistypeofloan. Familiescouldprovideuptotworeasons,but94.5percentofthosethathadtakenoutapaydayloaninthe pastyearprovidedonlyone.
98 FederalReserveBulletin|June2012 Althoughthesurveyinformationonuseissubstantial,itisnotexhaustive.Mostimportant, inthecaseof creditcards,itwasdeemedimpracticaltoaskaboutthepurposesof borrowing,whichmightwellbeheterogeneousforindividualfamilies.Fortheanalysishere,all creditcarddebtisincludedinthecategory“goodsandservices.”Thesurveysbefore2004 lackinformationontheuseof fundsborrowedthroughafirst-lienmortgage;therefore,for purposesof thiscalculation,allfundsowedonafirst-lienmortgageonaprimaryresidence areassumedtohavebeenusedforthepurchaseof thehome,evenwhenthehomeowner hadrefinancedthemortgageandextractedequityforanotherpurpose. Thegreatmajorityof familydebtisattributabletothepurchaseof aprimaryresidence; between2007and2010,theshareof debtforthispurposewasunchanged(at69.5percent). Lookingmorebroadlyatdebtforresidentialrealestate,therewasadecreaseinbalances owedonresidentialrealestateotherthantheprimaryresidence—thesecond-largestshare of debt—andasimilardecreaseinbalancesowedforimprovementsontheprimaryresidence.Theshareof debtattributabletovehiclepurchasesalsofell—0.8percentagepoint,to 4.7percentof thetotal. Witha1.6percentrisebetween2007and2010,thefractionof debtowedforeducation,at 5.2percent,exceededthefractionof borrowingforvehiclesforthefirsttimeintheSCF. Theincreaseintheshareof debtforeducationreflectstosomedegreethedecreaseinborrowingforotherpurposes,butthelevelof educationdebtalsorosesubstantially.Theshare of familieshavinganyeducationdebtrosefrom15.2percentin2007to19.2percentin 2010(datanotshowninthetables).Amongfamilieswitheducationdebt,themean increased14.0percent(from$22,500in2007to$25,600in2010),whilethemedianrose 3.4percent(from$12,600in2007to$13,000in2010). Thefractionof debtowedforgoodsandservicesfellbetween2007and2010from6.2percentto5.7percent.Thedeclineintheshareof debtinthegoodsandservicescategorywas smallerthanthatintheshareof debtforvehicles,sogoodsandservicescontinuedto accountforalargershareof debtoutstanding.Abouthalf of thedebtinthegoodsand servicescategory,50.1percent,wasoutstandingbalancesoncreditcards.57 Credit Market Experiences TheSCFalsocollectssomeinformationonfamilies’recentcreditmarketexperiences.Specifically,thesurveyaskswhetherthefamilyhadappliedforanytypeof creditinthepast fiveyearsand,if so,whetheranyapplicationwaseitherturneddownorgrantedforalesser amountthantheamountinitiallyrequested.Familiesthatgivesuchresponsesareaskedthe reasongivenforthedecision.Thesurveyalsoaskswhether,atanytimeinthepastfive years,thefamilyeverconsideredapplyingforcreditbutthendecidednottoapplybecause of abelief thattheapplicationwouldberejected.Suchfamilieswereaskedthereasonthey believedtheywouldhavebeenturneddown. In2010,61.7percentof familiesreportedthattheyhadappliedforcreditatsomepointin theprecedingfiveyears(66.3percentin2007).Of thesefamilies,33.9percenthadatleast onceintheprecedingfiveyearsbeeneitherturneddownforcreditorapprovedforless creditthantheamountforwhichtheyhadapplied(29.7percentin2007).Of allfamilies, 57 Thesurveysbeginningwith2004containinformationontheuseoffundsobtainedfromrefinancingafirst-lien mortgage.Ifthisinformationfor2010isusedintheclassificationofoutstandingdebtbypurpose,thesharesof debtwere,forhomepurchase,66.4percent;forhomeimprovements,2.9percent;forotherresidentialreal estate,11.0percent;forinvestmentsotherthanrealestate,2.3percent;forvehicles,4.8percent;forgoodsand services,6.9percent;foreducation,5.3percent;andforotherunclassifiedpurposes,0.4percent(datanot showninthetables).
ChangesinU.S.FamilyFinancesfrom2007to2010 99 18.5percenthadconsideredapplyingbutsubsequentlydidnotdosobecausetheythought theapplicationwouldbedenied(15.3percentin2007).Themostcommonreasons reportedforeitherhavingbeendeniedcreditorhavingnotappliedforcreditwererelatedto theborrower’screditcharacteristics,suchasthelackof acredithistory,previousperformanceonaloanoraccountfromanotherinstitution,andtheamountof debtheldbythe borrower,asshowninthefollowingtable:58 Table16.1 Familiesthatappliedforcreditandwere Familiesthatdidnotapplyforcredit Reasonturneddownordidnotapply turneddownorreceivedlesscreditthan becausetheyexpectedtobeturneddown theamountrequested(percent) (percent) Personalcharacteristics 1.7 2.2 Creditcharacteristics 55.5 62.9 Financialcharacteristics 33.0 28.2 Miscellaneous,includingnoreasongiven 9.8 6.8 In2010,theSCFbegancollectinginformationaboutcreditmarketexperiencesof small businessesownedbyfamilies.Althoughpersonalandbusinessfinancesmaybeintertwined, theremaybedifferencesintheeasewithwhichpersonsandbusinessesobtaincredit.In 2010,amongthe23.0percentof familieshavingasmallbusinessthatappliedforcreditin theprecedingfiveyears,25.1percentreportedhavingbeenturneddownorreceivedless creditthantheamountrequested,andanother7.5percentreportedtheydidnotapplyfor creditbecausetheythoughttheywouldbeturneddown.Amongthosewhowereturned downorreceivedlessthantheamountrequested,29.5percentreportedthereasonwaspersonalorbusinesscreditcharacteristics,50.4reporteditwasduetothefinancialcharacteristicsof thebusiness,and20.1percentreportedmiscellaneousreasons(datanotshownin thetables). Debt Burden Theabilityof individualfamiliestoservicetheirloansisafunctionof twofactors:thelevel of theirloanpaymentsandtheincomeandassetstheyhaveavailabletomeetthosepayments.Inplanningtheirborrowing,familiesmakeassumptionsabouttheirfutureabilityto repaytheirloans.Problemsmayoccurwheneventsturnouttobecontrarytothose assumptions.If suchmisjudgmentsaresufficientlylargeandprevalent,abroadpatternof default,restraintinspending,andfinancialdistressinthewidereconomymightensue (suchaswasseenintheperiodafterthe2007survey). TheFederalReservestaff hasconstructedanaggregate-leveldebtserviceratio,definedas anestimateof totalscheduledloanpayments(interestplusminimumrepaymentsof principal)forallfamilies,dividedbytotaldisposablepersonalincome.Fromthethirdquarterof 2007tothesameperiodin2010,theaggregate-levelmeasuredropped2.2percentage points,to11.7percent.59 58 Personalcharacteristicsincluderesponsesrelatedtofamilybackgroundorsize,maritalstatus,sex,orage;credit characteristicsincluderesponsesrelatedtotheneedtohaveacheckingorsavingsaccount,lackofacredithistory,creditreportsfromacreditratingagencyorfromotherinstitutions,orthelevelofoutstandingdebtand insufficientcreditreferences;andfinancialcharacteristicsincluderesponsesrelatedtopreviousdifficultygetting credit,more“strict”lendingrequirementsoftheinstitution,anerrorinprocessingtheapplication,orcredit problemsofanex-spouse. 59 Dataonthismeasure,the“debtserviceratio,”andadescriptionoftheseriesareavailableat www.federalreserve.gov/releases/housedebt/default.htm.SeeKarenDynan,KathleenJohnson,andKaren Pence(2003),“RecentChangestoaMeasureofU.S.HouseholdDebtService,”FederalReserveBulletin,vol.89 (October),pp.417–26,www.federalreserve.gov/pubs/bulletin/default.htm.
100 FederalReserveBulletin|June2012 Thesurveydataforindividualfamiliesmaybeusedtoconstructasimilarestimateof debt burdenforfamiliesoverallaswellasforvariousdemographicgroups(table17).60The SCF-basedestimateistheratioof totaldebtpaymentsforallfamiliestototalfamily incomeof allfamilies.From2007to2010,theSCF-basedestimatewasbarelychangedat 14.7percent;conceptualdifferencesbetweentheaggregatemeasureandtheSCF-based Table17.Ratioofdebtpaymentstofamilyincome(aggregateandmedian),shareofdebtorfamilies withratiogreaterthan40percent,andshareofdebtorswithanypayment60daysormorepastdue, 2001–10surveys Percent Debtorswithratiogreaterthan Debtorswithanypaymentpast Aggregate Medianfordebtors Family 40percent due60daysormore characteristic 2001 2004 2007 2010 2001 2004 2007 2010 2001 2004 2007 2010 2001 2004 2007 2010 Allfamilies 12.9 14.4 14.6 14.7 16.7 18.1 18.7 18.1 11.8 12.3 14.8 13.8 7.0 8.9 7.1 10.8 Percentileofincome Less than20 16.1 18.2 17.7 23.5 19.2 19.7 19.1 16.3 29.3 26.8 26.9 26.1 13.4 15.9 15.1 21.2 20–39.9 15.8 16.7 17.2 16.9 16.7 17.4 17.1 17.5 16.6 18.6 19.5 18.6 11.7 13.8 11.5 15.2 40–59.9 17.1 19.4 19.8 19.5 17.6 19.5 20.3 20.0 12.3 13.8 14.5 15.4 7.9 10.4 8.3 10.2 60–79.9 16.8 18.6 21.8 19.3 18.1 20.7 21.9 20.4 6.5 7.3 12.9 11.0 4.0 7.1 4.1 8.8 80–89.9 17.0 17.4 19.8 18.0 17.2 18.3 19.3 19.3 3.5 2.6 8.2 5.3 2.6 2.3 2.1 5.4 90–100 8.1 9.3 8.4 9.4 11.2 12.7 12.5 13.1 2.0 1.5 3.8 2.9 1.3 .3 .2 2.1 Ageofhead(years) Less than35 17.2 17.8 19.7 17.0 17.7 18.0 17.6 16.4 12.0 12.8 15.1 11.6 11.9 13.7 9.4 10.4 35–44 15.1 18.3 18.6 18.4 17.8 20.6 20.3 20.9 10.1 12.4 12.8 16.4 5.9 11.7 8.6 15.7 45–54 12.8 15.4 15.0 16.2 17.4 18.5 19.6 19.2 11.6 13.3 16.3 15.5 6.2 7.6 7.3 12.6 55–64 10.9 11.6 12.6 12.5 14.3 15.9 17.5 17.6 12.3 10.3 14.5 13.0 7.1 4.2 4.9 8.4 65–74 9.2 8.7 9.6 11.3 16.0 15.6 17.9 17.0 14.7 11.6 15.6 12.1 1.5 3.4 4.4 6.1 75ormore 3.9 7.1 4.4 6.8 8.0 12.8 13.0 14.1 14.6 10.7 13.9 11.9 .8 3.9 1.0 3.2 Percentileofnetworth Less than25 13.3 13.0 15.0 19.2 11.5 13.0 12.1 13.6 11.6 10.6 10.7 14.9 17.8 23.0 16.8 22.2 25–49.9 18.1 19.6 22.5 19.3 20.1 21.2 23.4 21.2 14.2 15.9 19.3 15.3 7.1 11.0 7.7 13.3 50–74.9 16.7 20.7 20.4 19.2 18.3 21.5 21.8 20.8 11.2 12.9 16.0 14.0 3.6 3.2 4.2 6.8 75–89.9 15.4 15.2 17.0 15.9 16.9 18.0 18.2 16.7 10.6 9.6 13.1 11.0 .7 1.0 1.2 2.0 90–100 7.4 8.6 8.1 8.8 11.2 12.7 12.7 13.4 8.5 7.6 11.1 11.0 .3 .1 .7 1.2 Housingstatus Owner 13.9 15.7 15.6 16.1 19.9 21.5 22.8 22.2 14.7 15.0 18.1 17.1 4.3 5.6 4.8 8.7 Renteror other 7.4 7.2 7.9 7.0 8.3 8.2 8.4 6.8 4.2 4.3 5.4 5.0 14.0 18.6 13.5 16.6 Note:Theaggregatemeasureistheratiooftotaldebtpaymentstototalincomeforallfamilies.Themedianisthemedianofthedistributionof ratioscalculatedforindividualfamilieswithdebt.Alsoseenotetotable1. 60 Thesurveymeasureofpaymentsrelativetoincomemaydifferfromtheaggregate-levelmeasureforseveralreasons.First,thedebtpaymentsincludedineachmeasurearedifferent.Theaggregate-levelmeasureincludesonly debtsoriginatedbydepositories,financecompanies,andotherfinancialinstitutions,whereasthesurvey includes,inprinciple,debtsfromallsources. Second,theaggregate-levelmeasureusesanestimateofdisposablepersonalincomefromthenationalincome andproductaccountsfortheperiodconcurrentwiththeestimatedpaymentsasthedenominatoroftheratio, whereasthesurveymeasureusestotalbefore-taxincomereportedbysurveyfamiliesfortheprecedingyear;the differencesinthesetwoincomemeasuresarecomplex. Third,thepaymentsintheaggregate-levelmeasureareestimatedusingaformulathatentailscomplexassumptionsaboutminimumpaymentsandthedistributionofloantermsatanygiventime;thesurveymeasureof paymentsisdirectlyaskedofthesurveyrespondentsbutmayalsoincludepaymentsoftaxesandinsuranceon realestateloans. Fourth,becausethesurveymeasuresofpaymentsandincomearebasedontheresponsesofasampleof respondents,theymaybeaffectedbothbysamplingerrorandbyvarioustypesofresponseerrors.Asmentionedearlierinthisarticle,thesurveyincomemeasuretracksthemostcomparablemeasureofincomeinthe CensusBureau’sCurrentPopulationSurvey.
ChangesinU.S.FamilyFinancesfrom2007to2010 101 estimatecanaccountforthisdivergenceintherecentperiod.61If totalpaymentsand incomesarecomputedfromthesurveydatausingonlyfamilieswithdebtpayments,the resultsfortherecentperiodshowanincreasefrom18.1percentin2007to18.5percentin 2010;if theratioiscomputedusingonlyfamilieswithhome-secureddebt,thedatashowa risefrom20.5percentin2007to21.1percentin2010(datanotshowninthetables).The SCF-basedestimateof theaggregatedebt-burdenratiodecreasedformanydemographic groupsovertherecentthree-yearperiod,buttherewerenotableincreasesforlow-income andlow-net-worthfamiliesaswellasfamiliesheadedbyapersonaged65orolder. Theabilitytolookatthedistributionof paymentsrelativetoincomeatthelevelof families potentiallyoffersinsightsthatarenotavailablefromanyof theaggregate-levelfigures.In particular,thesurveyallowsadetailedlookatthespectrumof paymentsrelativetoincome acrossallfamilieswithdebts.Overtherecentperiod,themedianof theratiosforindividual familiesthathadanydebtfell0.6percentagepoint,to18.1percentin2010;thisdeclineis smallrelativetothecumulativeincreasesinthismeasuresince1989thatwereotherwise interruptedonlybyadeclinebetween1998and2001.Changesinthemostrecentthreeyearperiodinthemedianratioof debtpaymentstoincomeacrossdemographicgroups weremixed.62 Alimitationof themedianratioisthatitmaynotbeindicativeof distressbecauseit reflectsthesituationof onlyatypicalfamily.Unlesserrorsof judgmentbybothfamilies andlendersarepervasive,onewouldnotexpecttoseesignsof financialdistressatthe median.Thus,amorecompellingindicatorof distressistheproportionof familieswith unusuallylargetotalpaymentsrelativetotheirincomes.From2007to2010,theproportion of debtorswithpaymentsexceeding40percentof theirprevious-yearincomefell1.0percentagepointto13.8percent;intheprecedingthreeyears,theproportionhadincreased 2.5percentagepoints.Thechangesweregenerallynegativeacrossdemographicgroups exceptfamiliesinthebottomnetworthgroup,forwhichthesharerose4.2percentage points.Changesformostof theincomegroupsweresmall,thoughfamilieswithincome betweenthe60thand80thpercentilessawa1.9percentagepointdeclineinthefraction exceedingthe40percentmark,andthosebetweenthe80thand90thincomepercentiles sawa2.9percentagepointdecline.63 Fluctuationsinafamily’sincomeawayfromitsusuallevelcanhavesubstantialeffectson thefamily’spayment-to-incomeratio.If thepaymentratioisdefinedintermsof families’ reportedusualincomes,thefractionof familieswitharatioexceeding40percentfallsto 10.0percent.This3.8percentagepointdifferencereflectstwofacts:first,4.4percentof familieswithdebthadrelativelyhighpayment-to-incomeratiosbasedontheprevious year’sincomebutwouldnothaveif incomehadbeenatitsusuallevel,and,second,afar smallershareof familieswithdebt—0.6percent—haddebtpaymentslessthanorequalto 40percentof lastyear’sincomebutwouldhavehadaratioabove40percentif incomehad beenatitsusuallevel.Familiesmaydrawonassetsaswellasincometomeetdebtpayments.Forallfamilieswithdebt,56.7percenthadtransactionaccountbalancesequaltoat leastthreemonthsof debtpaymentsin2010.Forfamilieswithpayment-to-incomeratios above40percent,however,thissharefellto22.4percent. 61 ThedefinitionofdebtpaymentsintheSCFdoesnotincludepaymentsonleasesorrentalpayments.Thesurveycollectsinformationonvehicleleasepaymentsandrentonprimaryresidences,and,thus,inprinciplea broadermeasureofdebtpaymentscouldbeconstructed,onethatwouldbesimilartothe“financialobligations ratio”estimatedbytheFederalReservestaff. 62 Themedianoftheratioforfamilieswithhome-secureddebtin2010was24.8percent,downfrom25.2percent in2007(datanotshowninthetables). 63 Offamilieswithhome-secureddebt,theproportionthathadtotalpaymentsofmorethan40percentoftheir incomewas19.3percentin2010,alevel0.9percentagepointlowerthanthatin2007(datanotshowninthe tables).
102 FederalReserveBulletin|June2012 Othercommonlyusedindicatorsof debt-repaymentproblemsareaggregatedelinquency rates—thatis,thepercentageof delinquentaccountsorthepercentageof totalbalanceson whichpaymentsarelate.Bothaccount-basedanddollar-weightedaggregatemeasuresindicatethatdelinquenciesonmortgagesrosesubstantiallyfromthethirdquarterof 2007to thethirdquarterof 2010,from3.0percentto8.7percentof accountsandfrom2.8percent to10.8percentof dollar-weightedaccounts.Overthe2007–10period,thepercentageof delinquentautomobileloansdeclinedslightly,whilethecorrespondingdollar-weighted measurerosebutremainedrelativelylowat2.8percent.Onnet,adollar-weighteddelinquencymeasureforotherclosed-endloansrosefrom2.5percentinthethirdquarterof 2007to3.4percentinthethirdquarterof 2010.Delinquencymeasuresforcreditcardsalso differedbywhetherthemeasurewasbasedondollarvolumeordelinquentaccounts,asthe account-weighteddelinquencyratefellfrom4.2percentto3.6percentbetweenthethird quarterof 2007andthethirdquarterof 2010,whilethedollar-weighteddelinquencyrate edgedupfrom4.4percentto4.6percentoverthesameperiod.64 Arelatedmeasureof delinquencyiscollectedintheSCF.Familiesthathaveanydebtatthe timeof theirinterviewareaskedwhethertheyhavebeenbehindinanyof theirloanpaymentsintheprecedingyear.Thismeasurediffersconceptuallyfromtheaggregatedelinquencyratesinthatthesurveycountsmultipleoccasionsof latepaymentsasone,counts familiesinsteadof balancesoraccounts,andincludesalltypesof loans;becauseitcounts individualfamilies,nottheirbalances,itiscloserinspirittoaggregatemeasuresbasedon thenumbersof delinquentaccountsthantothosebasedontheamountsof delinquentbalances.Thesurveyshowsalargeincreasefrom7.1percentin2007to10.8percentin2010in theproportionof debtorswhowere60ormoredayslatewiththeirpaymentsonanyof theirloansintheprecedingyear.Thismeasureroseforfamiliesineachof theincome groups,butproportionatelythechangeswerelargestforhigher-incomegroups;thepercentagealsoroseacrossnetworthgroups.Theshareof familieswithdebtthatwereatleast 60dayslateonapaymentduringtheprecedingyearroseacrossallagegroupsandforboth homeownersandrenters.65Forfamilieswithapayment-to-incomeratioof 40percentor more,22.0percentmissedadebtpaymentby60daysormore(upfrom13.8percentin 2007);bycomparison,9.1percentof debtorfamilieswithlowerratioshadfallenbehindin debtrepayment(upfrom6.0percentin2007). Summary Datafromthe2007and2010SCFshowthatmedianincomefellsubstantiallyandthat meanincomefellsomewhatfaster,anindicationthatincomelosses,atleastintermsof levels,werelargerforfamiliesintheuppermostpartof thedistribution.Overall,bothmedian andmeannetworthalsofelldramaticallyoverthisperiod—38.8percentand14.7percent, respectively.Changesinhousingwealthandbusinessequitywerekeydriversinthose wealthchanges.Theprecedingthreeyearshadseenonlysmallchangesinmedianandmean incomeandinmediannetworth,butasizablegaininmeannetworth. Althoughthemedianandmeanof families’holdingsof financialassetsdecreasedoverall from2007to2010,financialassetsroseasashareof totalassets,reversinganearliertrend. Theoffsettingdeclineintheshareof nonfinancialassetswasmoststronglydrivenbythe declineinrealestatepricesandthevalueof businessequity.Thehomeownershiprate, 64 ThemostcommonlyusedsuchmeasuresarefromtheConsolidatedReportsofConditionandIncome(Call Report),theAmericanBankersAssociation,andMoody’sInvestorsService. 65 Forfamilieswithhome-secureddebt,theresultisverysimilartothatforhomeownersoverall.Theproportion withpaymentslate60daysormorein2007was4.8percentafterrisingtoanestimated5.6percentin2004 (datanotshowninthetables).
ChangesinU.S.FamilyFinancesfrom2007to2010 103 whichhadrisennoticeablybetweenthe2001and2004surveys,continuedtotrenddownward,by2010retracingthepathtothelevelseenin2001.Declinesinunrealizedcapital gainswereanimportantpartof thedecreaseinassets;in2010,24.5percentof totalassets wereattributabletounrealizedcapitalgains,asharemorethan11percentagepointsbelow thatin2007;thedeclinewasprimarilyduetochangesinthevalueof holdingsof realestate orprivatebusinessequity. Debtfellmoreslowlythanassetsovertherecentthree-yearperiod.Thus,overallindebtednessasashareof assetsrosemarkedly.Home-secureddebtfellslightlyasashareof total familydebt,butin2010itremainedbyfarthelargestcomponentof familydebt.Theshare of borrowingforresidentialrealestateotherthantheprimaryresidencefellslightly,butin 2010itstayedhighbyhistoricalstandards.Thepercentageof familiesusingcreditcardsfor borrowingdroppedovertheperiod;themedianbalanceontheiraccountsfell16.1percent, andthemeanfell7.8percent.Useof education-relatedborrowingcontinuedtoincreasein therecentperiod,asthefractionof familieswitheducation-relateddebtrosefrom15.2percentto19.2percent,themeanbalanceamongthosewithsuchdebtrose14.0percent,and themedianbalanceincreased3.4percent. Decliningconsumerloaninterestratesbetween2007and2010helpedoffsetthefactthat debtroserelativetoincomeformanyfamilies.Asaresult,themedianratioof loanpaymentstofamilyincomefordebtors,acommonindicatorof debtburden,fellslightlyover theperiodto18.1percentin2010;thismeasureremainsabovethevaluesseeninthe 2001SCFandearlier.Datafromtherecentthree-yearperiodalsoshowadecreaseof 1.0percentagepointintheproportionof debtorswithloanpaymentsexceeding40percent of theirincome,aleveltraditionallyconsideredtobehigh;theshareof familieswithpaymentratiosthishighpeakedat14.8percentin2007.Thefractionof debtorswithanypayment60daysormorepastdueclimbedfrom7.1percentin2007to10.8percentin2010. Appendix: Survey Procedures and Statistical Measures Detaileddocumentationof theSurveyof ConsumerFinances(SCF)methodologyisavailableelsewhere.66The2010datausedherearederivedfromthefinalinternalversionof the surveyinformation.Datafromthissurvey,suitablyalteredtoprotecttheprivacyof respondents,alongwithadditionaltabulationsof datafromthesurveysbeginningwith 1989,areexpectedtobeavailableinJune2012ontheFederalReserve’swebsiteat www.federalreserve.gov/econresdata/scf/scf_2010survey.htm.Linkstothedatausedinthis articleforearlierperiodsareavailableonthatsite.Resultsreportedinthisarticleforearlier surveysmaydifferfromtheresultsreportedinearlierarticlesbecauseof additionalstatisticalprocessing,correctionof dataerrors,revisionstothesurveyweights,conceptual changesinthedefinitionsof variablesusedinthearticles,andadjustmentsforinflation. Asapartof thegeneralreconciliationsrequiredforthisarticle,thesurveydatawerecomparedwithmanyexternalestimates,afewof whicharementionedinthetext.Generally, thesurveyestimatescorrespondfairlywelltoexternalestimates.OneparticularlyimportantcomparisonisbetweentheSCFandtheFederalReserve’sflowof fundsaccountsfor thehouseholdsector.Thiscomparisonsuggeststhatwhenthedefinitionsof thevariables 66 SeeArthurB.Kennickell(2000),“WealthMeasurementintheSurveyofConsumerFinances:Methodology andDirectionsforFutureResearch”(Washington:BoardofGovernorsoftheFederalReserveSystem,May), www.federalreserve.gov/econresdata/scf/scf_workingpapers.htm;ArthurB.Kennickell(2001),“Modeling WealthwithMultipleObservationsofIncome:RedesignoftheSampleforthe2001SurveyofConsumer Finances”(Washington:BoardofGovernorsoftheFederalReserveSystem,October), www.federalreserve.gov/econresdata/scf/scf_workingpapers.htm;andreferencescitedinthesepapers.
104 FederalReserveBulletin|June2012 inthetwosourcescanbeadjustedtoacommonconceptualbasis,theestimatesof totalsin thetwosystemstendtobeclose.ThedataseriesintheSCFandintheflowof funds accountsusuallyshowverysimilargrowthrates.67Ingeneral,thedatafromtheSCFcanbe comparedwiththoseof othersurveysonlyintermsof themediansbecauseof thespecial designof theSCFsample. Adjustment for Inflation Inthisarticle,alldollaramountsfromtheSCFareadjustedto2010dollarsusingthe“currentmethods”versionof theconsumerpriceindex(CPI)forallurbanconsumers.Inan ongoingefforttoimproveaccuracy,theBureauof LaborStatisticshasintroducedseveral revisionstoitsCPImethodology.Thecurrent-methodsindexattemptstoextendthese changestoearlieryearstoobtainaseriesasconsistentaspossiblewithcurrentpracticesin theofficialCPI.68Toadjustassetsandliabilitiesto2010dollarsandtoadjustfamily incomefortheprecedingcalendaryearto2010,thefiguresgiveninthefollowingtablewere applied: TableA.1 Adjustmentfactorforassetsanddebtsinthe Adjustmentfactorforincomeinthecalendaryear Surveyyear surveyyear beforethesurveyyear 2001 1.2254 1.2598 2004 1.1507 1.1817 2007 1.0477 1.0774 2010 1.0000 1.0165 Definition of “Family” in the SCF Thedefinitionof “family”usedthroughoutthisarticlediffersfromthattypicallyusedin othergovernmentstudies.IntheSCF,ahouseholdunitisdividedintoa“primaryeconomicunit”(PEU)—thefamily—andeveryoneelseinthehousehold.ThePEUisintended tobetheeconomicallydominantsinglepersonorcouple(whethermarriedorliving togetheraspartners)andallotherpersonsinthehouseholdwhoarefinanciallyinterdependentwiththateconomicallydominantpersonorcouple. Thisreportalsodesignatesaheadof thePEU,nottoconveyajudgmentabouthowan individualfamilyisstructuredbutasameansof organizingthedataconsistently.If a coupleiseconomicallydominantinthePEU,theheadisthemaleinamixed-sexcoupleor theolderpersoninasame-sexcouple.If asinglepersoniseconomicallydominant,that personisdesignatedasthefamilyheadinthisreport. Percentiles of the Distributions of Income and Net Worth Throughoutthisarticle,referencesaremadetovariouspercentilegroupsof thedistributionsof incomeornetworth.Foragivencharacteristic,apercentilecanbeusedtodefinea family’srankrelativetootherfamilies.Forexample,the10thpercentileof thedistribution of incomeistheamountof incomereceivedbyafamilyforwhomjustlessthan10percent 67 Fordetailsonhowthesecomparisonsarestructuredandtheresultsofcomparisonsforearliersurveys,see RochelleL.Antoniewicz(2000),“AComparisonoftheHouseholdSectorfromtheFlowofFundsAccounts andtheSurveyofConsumerFinances”(Washington:BoardofGovernorsoftheFederalReserveSystem, October),www.federalreserve.gov/econresdata/scf/scf_workingpapers.htm. 68 Fortechnicalinformationabouttheconstructionofthisindex,seeKennethJ.StewartandStephenB.Reed (1999),“ConsumerPriceIndexResearchSeriesUsingCurrentMethods,1978–98,”MonthlyLaborReview, vol.122(June),pp.29–38.
ChangesinU.S.FamilyFinancesfrom2007to2010 105 of familieshavelowerincomeand90percenthavehigherincome.Thepercentilesof the distributionsof incomeandnetworthusedtodefinetheincomeandnetworthgroupsin thetablesinthearticlearegiveninthefollowingtable: TableA.2 Surveyyear Item 2001 2004 2007 2010 Percentileofincome 20 20,600 21,800 21,500 20,400 40 37,800 39,000 38,200 35,600 60 63,000 61,700 62,500 57,800 80 100,800 102,800 102,900 94,600 90 145,600 148,900 147,600 142,300 Percentileofnetworth 25 15,700 15,300 14,800 8,300 50 106,100 107,200 126,400 77,300 75 351,800 378,800 390,600 301,700 90 907,000 959,600 955,600 952,500 Thegroupsthatarecreatedwhenadistributionisdividedatevery10thpercentilearecommonlyreferredtoasdeciles.Similarly,whenadistributionisdividedatevery20th (25th)percentile,thegroupsareknownasquintiles(quartiles).Familiesinthefirstincome decile,forexample,arethosewithincomebelowthe10thpercentile. Racial and Ethnic Identification Inthisarticle,theraceandethnicityof afamilyintheSCFareclassifiedaccordingtothe self-identificationof thatfamily’soriginalrespondenttotheSCFinterview.Thequestions underlyingthemethodof classificationusedinthesurveywerechangedinboth1998and 2004.Startingin1998,SCFrespondentswereallowedtoreportmorethanoneracialidentification;insurveysbeforethen,onlyoneresponsewasrecorded.Formaximumcomparabilitywithearlierdata,respondentsreportingmultipleracialidentificationswereaskedto reporttheirstrongestracialidentificationfirst.Inthe2010SCF,6.1percentof respondents reportedmorethanoneracialidentification,upfrom5.4percentin2007and2.3percentin 2004. Beginningwiththe2004survey,thequestiononracialidentificationisprecededbyaquestiononwhetherrespondentsconsiderthemselvestobeHispanicorLatinoincultureororigin;previously,suchethnicidentificationwascapturedonlytotheextentthatitwas reportedasaresponsetothequestiononracialidentification.Thesequenceof thesetwo questionsinthe2004SCFissimilartothatintheCurrentPopulationSurvey(CPS).When familiesintheMarch2004CPSareclassifiedinthewaymostcompatiblewiththeSCF,the proportionof Hispanicfamiliesis10.5percent;the2004SCFestimateis11.2percent.Differencesintheseproportionsareattributabletosamplingerrorandpossiblytodifferences inthewordingandcontextof thequestions. ForgreatercomparabilitywiththeearlierSCFdata,thedatareportedinthisarticleignore theinformationonethnicidentificationavailableinthesurveyssince2004,butrespondents reportingmultipleracialidentificationsinthesurveysstartingwith1998areclassifiedas “nonwhiteorHispanic.”Of thosewhorespondedaffirmativelytothequestiononHispanicorLatinoidentificationin2010,89.5percentalsoreported“HispanicorLatino”as oneof theirracialidentifications,and82.3percentreporteditastheirprimaryracialidentification.BecausethequestiononHispanicorLatinoethnicityprecedestheoneonracial
106 FederalReserveBulletin|June2012 identificationinthesurveysfrom2004through2010,theanswertothesecondof thesetwo questionsmayhavebeeninfluencedbytheanswertothefirst.69 The Sampling Techniques Thesurveyisexpectedtoprovideacoresetof dataonfamilyincome,assets,andliabilities. Themajoraspectsof thesampledesignthataddressthisrequirementhavebeenconstant since1989.TheSCFcombinestwotechniquesforrandomsampling.First,astandardmultistagearea-probabilitysample(ageographicallybasedrandomsample)isselectedtoprovidegoodcoverageof characteristics,suchashomeownership,thatarebroadlydistributed inthepopulation. Second,asupplementalsampleisselectedtodisproportionatelyincludewealthyfamilies, whichholdarelativelylargeshareof suchthinlyheldassetsasnoncorporatebusinesses andtax-exemptbonds.Calledthe“listsample,”thisgroupisdrawnfromalistof statistical recordsderivedfromtaxreturns.Theserecordsareusedunderstrictrulesgoverningconfidentiality,therightsof potentialrespondentstorefuseparticipationinthesurvey,andthe typesof informationthatcanbemadeavailable.PersonslistedbyForbesmagazineasbeing amongthewealthiest400peopleintheUnitedStatesareexcludedfromsampling. Of the6,492interviewscompletedforthe2010SCF,5,012werefromthearea-probability sample,and1,480werefromthelistsample;for2007,2,914werefromthearea-probability sample,and1,507werefromthelistsample.Thenumberof familiesrepresentedinthesurveysconsideredinthisarticleisgivenbythefollowingtable: TableA.3 Year Numberoffamiliesrepresented(millions) 2001 106.5 2004 112.1 2007 116.1 2010 117.6 The Interviews Asidefromtheadditionof newquestionsinthe2010surveytoaddressthefinancialrelationshipsof businessesthatarenotpubliclytraded,thesurveyquestionnairehaschanged inonlyminorwayssince1989,exceptinasmallnumberof instancesinwhichthestructure wasalteredtoaccommodatechangesinfinancialbehaviors,intypesof financialarrangementsavailabletofamilies,andinregulationscoveringdatacollection.Inthesecases andinallearlierones,everyefforthasbeenmadetoensurethemaximumdegreeof comparabilityof thedataovertime.Exceptwherenotedinthearticle,thedataarehighlycomparableovertime. Thegenerosityof familiesingivingtheirtimeforinterviewshasbeencrucialtotheSCF.In the2010SCF,themedianinterviewlengthwasabout90minutes.However,insomeparticularlycomplicatedcases,theamountof timeneededwassubstantiallymorethanthree hours.Theroleof theinterviewersinthiseffortisalsocritical.Withouttheirdedication andperseverance,thesurveywouldnotbepossible. 69 Foracomprehensivediscussionofstandardsfordefiningraceandethnicity,seeExecutiveOfficeofthePresident,OfficeofManagementandBudget(2002),“ProvisionalGuidanceontheImplementationofthe1997 StandardsforFederalDataonRaceAndEthnicity,”ExecutiveOfficeofthePresident,www.whitehouse.gov/ omb/fedreg_race-ethnicity.
ChangesinU.S.FamilyFinancesfrom2007to2010 107 TheSCFinterviewswereconductedlargelybetweenthemonthsof MayandDecemberin eachsurveyyearbyNORC,asocialscienceandsurveyresearchorganizationattheUniversityof Chicago.Themajorityof interviewswereobtainedinperson,althoughinterviewerswereallowedtoconducttelephoneinterviewsif thatwasmoreconvenientforthe respondent.Eachinterviewerusedaprogramrunningonalaptopcomputertoadminister thesurveyandcollectthedata. Theuseof computer-assistedpersonalinterviewinghasthegreatadvantageof enforcing systematiccollectionof dataacrossallcases.Thecomputerprogramdevelopedtocollect thedatafortheSCFwastailoredtoallowthecollectionof partialinformationintheform of rangeswheneverarespondenteitherdidnotknowordidnotwanttorevealanexact dollarfigure. Theresponserateinthearea-probabilitysampleismorethandoublethatinthelistsample. Inboth2007and2010,about70percentof householdsselectedforthearea-probability sampleactuallycompletedinterviews.Theoverallresponserateinthelistsamplewasabout one-third;inthepartof thelistsamplelikelycontainingthewealthiestfamilies,the responseratewasonlyaboutone-half thatlevel. Weighting Toprovideameasureof thefrequencywithwhichfamiliessimilartothesamplefamilies couldbeexpectedtobefoundinthepopulationof allfamilies,ananalysisweightiscomputedforeachcase,accountingbothforthesystematicpropertiesof thesampledesignand fordifferentialpatternsof nonresponse.TheSCFresponseratesarelowbythestandards of someothermajorgovernmentsurveys,andanalysisof thedataconfirmsthatthetendencytorefuseparticipationishighlycorrelatedwithnetworth.However,unlikeothersurveys,whichalmostcertainlyalsohavedifferentialnonresponsebywealthyhouseholds,the SCFhasthemeanstoadjustforsuchnonresponse.Amajorpartof SCFresearchis devotedtotheevaluationof nonresponseandadjustmentsfornonresponseintheanalysis weightsof thesurvey.70 Sources of Error Errorsmaybeintroducedintosurveyresultsatmanystages.Samplingerror—thevariabilityexpectedinestimatesbasedonasampleinsteadof acensus—isaparticularlyimportant sourceof error.Sucherrorcanbereducedeitherbyincreasingthesizeof asampleor,asis doneintheSCF,bydesigningthesampletoreduceimportantsourcesof variability.Samplingerrorcanbeestimated,andforthisarticle,weusereplicationmethodstodoso. Replicationmethodsdrawsamples,calledreplicates,fromthesetof actualrespondentsina waythatincorporatestheimportantdimensionsof theoriginalsampledesign.IntheSCF, weightswerecomputedforallof thecasesineachof thereplicates.71Foreachstatisticfor whichstandarderrorsarereportedinthisarticle,theweightedstatisticisestimatedusing thereplicatesamples,andameasureof thevariabilityof theseestimatesiscombinedwitha measureof thevariabilityduetoimputationformissingdatatoyieldthestandarderror. 70 Theweightsusedinthisarticleareadjustedfordifferentialratesofnonresponseacrossgroups.SeeArthurB. Kennickell(1999),“RevisionstotheSCFWeightingMethodology:AccountingforRace/EthnicityandHomeownership”(Washington:BoardofGovernorsoftheFederalReserveSystem,January), www.federalreserve.gov/econresdata/scf/scf_workingpapers.htm. 71 SeeArthurB.Kennickell(2000),“RevisionstotheVarianceEstimationProcedurefortheSCF”(Washington: BoardofGovernorsoftheFederalReserveSystem,October),www.federalreserve.gov/econresdata/scf/ scf_workingpapers.htm.
108 FederalReserveBulletin|June2012 Othererrorsincludethosethatinterviewersmayintroducebyfailingtofollowthesurvey protocolormisunderstandingarespondent’sanswers.SCFinterviewersaregivenlengthy, project-specifictrainingandongoingcoachingtominimizesuchproblems.Respondents mayintroduceerrorbyinterpretingaquestioninasensedifferentfromthatintended bythesurvey.FortheSCF,extensivepretestingof questionsandthoroughreviewof the datatendtoreducethissourceof error. Nonresponse—eithercompletenonresponsetothesurveyornonresponsetoselecteditems withinthesurvey—maybeanotherimportantsourceof error.Asnotedinmoredetailearlier,theSCFusesweightingtoadjustfordifferentialnonresponsetothesurvey.Toaddress missinginformationonindividualquestionswithintheinterview,theSCFusesstatistical methodstoimputemissingdata;thetechniquemakesmultipleestimatesof missingdatato allowforanestimateof theuncertaintyattributabletothistypeof nonresponse.
109 Federal Reserve BULLETIN September 2012 Vol. 98, No. 4 Use of Financial Services by the Unbanked and Underbanked and the Potential for Mobile Financial Services Adoption MatthewB.Gross,JeanneM.Hogarth,andMaximilianD.Schmeiser,of theBoard’sDivisionof ConsumerandCommunityAffairspreparedthisarticlewithassistancefromEmilyA. Andruska,AliceM.Cope,AndrewJ.Daigneault,andEvannK.Heidersbach. Mobilephoneusehasbecomeastandardaspectof dailylifeformanyAmericansinthe lastdecade.Theincreaseduseof thesedevicescoupledwiththeevolutionof technologies thatenableconsumerstoconductfinancialtransactionsusingtheirmobilephoneshasthe potentialtochangehowconsumersmanagetheirfinancesasnewservicesandtools emerge.Inaddition,innovativefinancialservicetechnologiesmayhelpfosterfinancial accessandinclusioninthemainstreamfinancialsystemforunderservedconsumers—those whoareunbankedorunderbanked.Forthesereasons,theFederalReserveBoardhasbeen monitoringtrendsanddevelopmentsinmobilefinancialservicessuchasmobilebanking andpayments.InlateDecember2011andearlyJanuary2012,theBoard’sDivisionof ConsumerandCommunityAffairs(DCCA)conductedasurveyinordertobetterunderstandconsumers’useof andopinionsaboutmobilefinancialservices.1 Key Findings UsingdatafromtheBoard’sSurveyof ConsumersandMobileFinancialServices (SCMFS),thisarticleprovidesadescriptionof unbankedandunderbankedconsumers, andexaminestheiruseof financialproductsandservices(seeAppendixA:SurveyData Collection).Thearticlefurtherexploreshowunbankedandunderbankedconsumersare makinguseof emergingmobilefinancialservicestechnologies.Thepotentialformobile bankingandmobilepaymentstoexpandaccessandinclusiontothemainstreamfinancial systemisalsoexamined.Severalkeyfindingsfromthesurveystandout: ‰ Approximately11percentof U.S.consumersareunbanked,andanother11percentare underbanked. Note:WegratefullyacknowledgethehelpofFederalReserveSystemstaffwhoservedontheadvisoryteamforthis project:AnaCavazos-Wright,FederalReserveBankofAtlanta;JuliaCheney,FederalReserveBankofPhiladelphia; DouglasConover,FederalReserveBankofSanFrancisco;MarianneCrowe,FederalReserveBankofBoston;Kevin Foster,FederalReserveBankofBoston;BobHunt,FederalReserveBankofPhiladelphia;DouglasKing,Federal ReserveBankofAtlanta;DanielA.Littman,FederalReserveBankofCleveland;BrianMantel,FederalReserve BankofChicago;TimMead,FederalReserveBankofRichmond;CynthiaMerritt,FederalReserveBankofAtlanta; RichardOliver,formerlyoftheFederalReserveBankofAtlanta;ScottSchuh,FederalReserveBankofBoston;RichardTodd,FederalReserveBankofMinneapolis;andHanbingZhang,FederalReserveBankofBoston. 1 SeeMatthewB.Gross,JeanneM.Hogarth,andMaximilianD.Schmeiser(2012),“ConsumersandMobileFinancial Services,”report(Washington:BoardofGovernorsoftheFederalReserveSystem,March),www.federalreserve.gov/ econresdata/mobile-devices/files/mobile-device-report-201203.pdf.
110 FederalReserveBulletin|September2012 ‰ Unbankedandunderbankedconsumersaremorelikelythanfullybankedconsumersto havelowerincomesandbeyounger,minority,female,unmarried,unemployed,and unwillingtotakefinancialrisks. ‰ Unbankedandunderbankedconsumersarealsomorelikelytousealternativefinancial serviceproviders,suchascheckcashers;payday,title,andpawnlenders;orrent-to-own services. ‰ Sixty-threepercentof unbankedconsumershaveamobilephone,and91percentof underbankedconsumershaveamobilephone. ‰ Themostfrequentmobilebankingactivityreportedbyrespondentsoverallwaschecking accountbalancesorrecenttransactions(90percent),whilethemostfrequenttypeof mobilepaymentactivitywaspayingabillonline(47percent). ‰ Underbankedconsumersmakecomparativelyheavyuseof bothmobilebankingand mobilepayments—28percenthaveusedmobilebankingand17percenthaveused mobilepaymentsinthepast12months,comparedwith21and12percent,respectively, of fullybankedconsumers. Why the Focus on Financially Underserved Groups? Consumers’accesstofinancialaccountsandinclusioninthemainstreamfinancialmarketplacehavelongbeenonthemindsof policymakers,whohaveexploredwaystoreducebarriersandincreaseaccesstomainstreamfinancialservicesinordertoencouragecostsavings,publicsafety,disasterpreparedness,andassetbuildingforunderservedgroups.2For example,theEFT’99initiative(developedtoimplementtheDebtCollectionImprovement Actof 1996)includedaprovisionrequiringselectedfederalpaymentstobemadebydirect deposit,spurringaninterestinbringingunbankedhouseholdsintothefinancialmainstream.3AndinDecember2010,theTreasuryDepartment’sFinancialManagementServicepublishedrulesrequiringrecipientsof federalnontaxpayments,includingmany unbankedbenefitrecipients,toreceivepaymentbyelectronicfundstransfer.Thosewithout abankaccountfordirectdepositwillbeissuedaprepaiddebitcardaspartof theGo Directprogram.4 DatafromtheFederalReserveBoard’s2010Surveyof ConsumerFinances(SCF)show that7.5percentof households(about8.8millionhouseholds)havenotransactionaccounts (thatis,nochecking,savings,moneymarketdepositaccounts,moneymarketmutualfunds, 2 Signe-MaryMcKernanandMichaelSherraden(2008),AssetBuildingandLow-IncomeFamilies(Washington: UrbanInstitutePress);andMichaelBarr(2012),NoSlack:TheFinancialLivesofLow-IncomeAmericans (Washington:BrookingsInstitution).Forexample,theDepartmentoftheTreasuryhasanOfficeofFinancial EducationandFinancialAccessandtheFederalDepositInsuranceCorporationhasanAdvisoryCommittee onEconomicInclusion. 3 ForadescriptionoftheEFT’99initiative,seeJeanneM.HogarthandKevinH.O’Donnell(1999),“Banking RelationshipsofLower-IncomeFamiliesandtheGovernmentalTrendtowardElectronicPayment,”Federal ReserveBulletin,vol.87,pp.459–73,www.federalreserve.gov/pubs/bulletin/1999/0799lead.pdf. 4 31CFR208;see73Fed.Reg.80315(December22,2010),www.gpo.gov/fdsys/pkg/FR-2010-12-22/pdf/2010- 32117.pdf.ForinformationonGoDirect,seewww.godirect.gov/gpw/index.gd.TherulerequiresanyoneapplyingforbenefitsonorafterMay2011toreceiveallpaymentselectronicallyviadirectdeposittoadeposit accountatadepositoryinstitutionorviaaprepaidcard.Treasuryhascontractedwithacommercialbankto makeDirectExpress®DebitMasterCard®prepaidcardaccountsavailabletorecipientswhowillnotbereceivingbenefitsviadirectdeposit;thesecardscanbeusedlikeotherdebitcards,andfundsthatrecipientsreceive throughthecardareFDICinsured.Thereisnocosttosignupforthecardandnomonthlyfee,althoughthere arefeesforsomeoptionaltransactions(suchasmakingmorethanoneATMwithdrawalinasinglemonth, receivingapaperstatementandgettingareplacementcard).Recipientscurrentlyreceivingbenefitsviachecks willberequiredtoswitchtoanelectronicpaymentmethodbyMarch2013.
Useof FinancialServicesbytheUnbankedandUnderbanked 111 orcallorcashaccountsatbrokerages).5Incomparison,the2011FederalDepositInsuranceCorporation(FDIC)NationalSurveyof UnbankedandUnderbankedHouseholds foundthat8.2percentof U.S.households(approximately10millionhouseholds)were unbanked.6Thus,whiletheproportionof unbankedhouseholdsmayseemsmall,theabsolutenumberof thesehouseholdsisquitelarge. Beingunbankedintoday’sfinancialmarketplacecanbeproblematicforconsumers.Consumerswhooperateonacash-onlybasismayfacefeesforcashingchecksandformoney ordersneededtopaysomebills.Forexample,thecostof usingacheck-cashingservicecan rangefromabout2percentof thefacevalueof thecheckwhenregulatedbystatesto4or 5percentwhennot.7Inaddition,conductingtransactionsonlyincashpresentsfinancial andpersonalrisks,sincethereisnorecoursewhencashislostorstolen.Further,consumerswhoprefercashmaynotbebuildingafinancialidentitythroughconsumerandcredit reportingagencies.Finally,manyof theconsumerprotectionsavailabletofullybanked consumers,suchasFDICinsuranceandprotectionsprovidedtocreditanddebitcardusers undertheTruthinLendingActandtheElectronicFundTransferAct,arenotavailableto consumerswhousealternativefinancialservices.Forthesereasons,theremaybesomebenefitsforconsumerstoconnectwithmainstreambankingandfinancialservices. Inadditiontounbankedconsumers,thereisasegmentof consumerswithbankaccounts whoalsousealternativefinancialserviceproviders,suchascheckcashers,moneyorder providers,paydaylenders,pawnshops,autotitlelenders,orrent-to-ownmerchants.The FDICsurveyreportestimatesthat20.1percentof householdsareunderbanked;thatis, theyuseoneormoreof thesealternativefinancialservices.Theseserviceprovidersoften chargehigherimplicitinterestratesorfeesthanbanksmightchargeandmaylacksome consumerprotections.Again,theremaybesomebenefitforconsumerstoconductmore transactionswithmainstreamfinancialservices.8 Who Are the Unbanked and Underbanked? Inthisarticle,wedefineanunbankedconsumerassomeonewhodoesnothaveachecking, savings,ormoneymarketaccount;also,theconsumer’sspouseorpartnerdoesnothave suchanaccount.Anunderbankedconsumerissomeonewhohasachecking,savings,or moneymarketaccountbutwhoalsohasusedatleastonealternativefinancialserviceinthe past12months,suchasanautotitleloan,paydayloan,check-cashingservice,orpayroll card.Bycontrast,werefertoaconsumerwhohasabankaccountanddoesnotusealternativefinancialservicesas“fullybanked.” Theproportionsof respondentswhoreportbeingunbankedorunderbankedinthissurvey aresimilartothosefoundinpreviousnationalstudies,anddifferencescanbeexplainedin partbyvariationinthedefinitions.Asestimatedfromthedatacollectedinthisstudy,the 5 JesseBricker,ArthurB.Kennickell,KevinB.Moore,andJohnSablehaus(2012),“ChangesinU.S.Family Financesfrom2007to2010:EvidencefromtheSurveyofConsumerFinances,”FederalReserveBulletin,vol. 98(2),pp.1–80,www.federalreserve.gov/pubs/bulletin/2012/PDF/scf12.pdf. 6 FederalDepositInsuranceCorporation(2012),2011NationalSurveyofUnbankedandUnderbankedHouseholds(Washington:FDIC,September),www.fdic.gov/householdsurvey. 7 MarthaPerineBeard(2010),“ReachingtheUnbankedandUnderbanked,”FederalReserveBankofSt.Louis, CentralBanker,vol.20(Winter),www.stlouisfed.org/publications/pub_assets/pdf/cb/2010/CB_winter_10.pdf. 8 Consumersmaychoosetousealternativefinancialservicesforanumberofreasons(convenience,comfort, etc.);however,theypayahighercostforthesebenefits.SeeWilliamH.Greene,SherrieL.W.Rhine,andMaude Toussaint-Comeau(2003),“TheImportanceofCheck-CashingBusinesstotheUnbanked:Racial/EthnicDifferences,”workingpaper(Chicago:FederalReserveBankofChicago,August),www.chicagofed.org/digital_ assets/publications/working_papers/2003/wp2003-10.pdf.
112 FederalReserveBulletin|September2012 nationalproportionof unbankedconsumersisabout11percentof theU.S.adultpopulation.Thisnumbercompareswithapproximately8percentof householdsbasedonthe2011 FDICNationalSurveyof UnbankedandUnderbankedHouseholdsand7.5percentof householdsbasedontheFederalReserveBoard’s2010SCF.Moreover,thedataforthis studyindicatethatanadditional11percentof theU.S.populationisunderbanked.This rateiswellbelowthe20percentunderbankedratefoundintheFDICstudy;however,the definitionof underbankedhereisnarrowerthantheFDIC’sdefinition,asthelatter includesconsumers’useof servicessuchasmoneyorderswhenclassifyinganindividualas underbanked.9 RespondentstotheSCMFSreportavarietyof reasonsfornothavingabankaccount.Of theunbankedparticipantsinthestudy,24percentsaytheydonotlikedealingwithbanks, and24percentindicatetheydonotwriteenoughcheckstomakeabankaccountworthwhile.Another13percentsaythatthefeesandservicechargesaretoohigh,and10percent saythatnobankwillgivethemanaccount(seebox1,“WhyAretheUnbanked Unbanked?”). Household Characteristics of the Unbanked and Underbanked Ingeneral,unbankedandunderbankedhouseholdstendtohavelow-to-moderateincomes (table1).Unbankedhouseholdsaremostlikelytobelowincome:61percentreport incomesof lessthan$25,000.Underbankedhouseholdsaremorelikelytohavemoderate incomesinthe$25,000to$39,999range.10 Unbankedhouseholdsareyoungerthanothers,withamedianageof 39.Morethanone outof three(36percent)areages18to29whileonly8percentareoverage60.Nearly three-fourthsof unbankedhouseholds(74percent)reporthavingahighschooleducation orless,consistentwiththelowerincomeprofileforthisgroup.Theunbankedarelesslikely tobehomeowners,withonly42percentowningtheirhome,comparedto60percentof the underbankedand76percentof thefullybanked. Thesurveyquestionregardingbankingstatuswaswordedas“Doyouordoesyourspouse/ partnercurrentlyhaveachecking,savings,ormoneymarketaccount?”Unbankedrespondentsaremorelikelytobeunmarried,andinparticular,theyaremorelikelytohavenever married(consistentwithbeingyounger).Householdswithmorepeoplemaymeanthereis greateropportunityforatleastonepersoninthehouseholdtohaveanaccount. Blackrespondentsaremorelikelytoreportthattheirhouseholdsareunbankedorunderbanked,consistentwithfindingsfromotherstudies.11Respondentsinthe“other”racecategoryandthosereportingtwoormoreraces(butwhoarenon-Hispanic),aremorelikelyto beinunbankedhouseholdsthannon-Hispanicwhiterespondents. Individualswhoareexperiencingunemployment,butwhoarestillinthelaborforce,are morelikelytobeunbanked.Nearlyoneoutof threerespondentswholiveinanunbanked household(32.5percent)reportthattheyaretemporarilylaidoff orlookingforwork. 9 TheFDICdefinestheunderbankedasthosewhohaveusednonbankmoneyorders,nonbankcheck-cashing services,paydayloans,rent-to-ownagreements,pawnshops,refund-anticipationloans,ornonbankremittances withinthelastyear.Indefiningunbanked,theFDICandSCFsurveysaskifanyoneintherespondent’shouseholdhasabankaccount,whereasweonlyaskaboutthespouse/partner.Someofthesedifferencesmaybedue tothemarginsoferrorinthevarioussurveys. 10 Allthedifferencesincharacteristicsbybankingstatusdiscussedinthissectionarestatisticallysignificantatthe 5percentlevelwhencontrollingforothercharacteristicsinaregressionanalysis.Theseresultsareavailable fromtheauthorsuponrequest. 11 HogarthandO’Donnell,“BankingRelationships”;andFDIC,2011NationalSurvey.
Useof FinancialServicesbytheUnbankedandUnderbanked 113 Box 1. Why Are the Unbanked Unbanked? Accordingtoseveralstudies,themostfrequentlyreportedreasonforafamilynothaving anaccountwithadeposit-takinginstitutionisthattheyhavelittletonomonth-to-month financialsavingstodepositinanaccount.1Otherstudiescitenegativepastexperiences, mistrustofbanks,andthegreaterconveniencefoundinalternativefinancialservicesas reasonswhyconsumerschoosetobeunbanked.2Finally,someconsumersmaychooseto abstainfromtraditionalbankservicesforculturalorotherreasons.Forexample,aqualitativestudyoftheunbankedandunderbankedpopulationsinthe10thFederalReserve District(KansasCity)founddifferencesbetweenHispanicandnon-Hispanicconsumersin theirviewofhowtheymanagedfinancialresourcesandhowthataffectedtheirdesireto haveacheckingaccount. InboththesurveydiscussedhereandtheBoard’s2010SurveyofConsumerFinances (SCF),thetopthreereasonsconsumersgavefornothavingabankaccountorachecking accountwereconsistent:consumersreportedthattheydidnotlikedealingwithbanks, theydidn’tthinktheywroteenoughcheckstomakeitworthwhile,andtheythoughtthe feesandservicechargesweretoohigh(seetableA).Respondentsinthissurveyalso reportedthattheydidnotthinkanybankwouldgivethemanaccount,whilerespondents intheSCFreportedthattheythoughttheydidnothaveenoughmoneyorthattheydidnot needorwantanaccount.Minimumbalancerequirementswerecitedby7percentofthe SCFrespondents,butbyaninsignificantnumberofthissurvey’srespondents,asareason fornothavinganaccount. TableA.Mostimportantreasonfornothavingabankaccount Percent MobileFinancialServices 2010SurveyofConsumer Survey1 Finances2 Idon’tlikedealingwithbanks 24.2 27.8 Idon’twriteenoughcheckstomakeitworthwhile 23.5 20.3 Thefeesandservicechargesaretoohigh 13.3 10.6 Nobankwillgivemeanaccount 10.2 … Theminimumbalanceistoohigh * 7.4 Nobankhasconvenienthoursorlocation * … Donothaveenoughmoney … 10.3 Donotneed/wantanaccount … 7.3 Cannotmanageorbalanceacheckingaccount … 4.7 Creditproblems … 4.2 Other 17.8 7.4 1 Seewww.federalreserve.gov/econresdata/mobile-device-report-201203.pdf. 2 Seewww.federalreserve.gov/pubs/bulletin/2012/PDF/scf12.pdf. ...Notapplicable(responsewasnotprovidedinthesurveyinstrument). *Tenorfewerobservations. 1 JohnCaskey(2005),“ReachingOuttotheUnbanked,”inM.W.Sherraden,ed.,InclusionintheAmericanDream: Assets,Poverty,andPublicPolicy(NewYork:OxfordUniversityPress);JeanneM.Hogarth,ChristoslavE. Anguelov,andJinkookLee(2004),“WhyDon’tHouseholdsHaveaCheckingAccount?”JournalofConsumer Affairs,vol.38(1),pp.1–34;andJeanneM.Hogarth,ChristoslavE.Anguelov,andJinkookLee(2004),“Why HouseholdsDon’tHaveCheckingAccounts,”EconomicDevelopmentQuarterly,vol.17(1),pp.75–94. 2 FederalReserveBankofKansasCity(2010),“UnbankedandUnderbankedConsumersinthe10thFederal ReserveDistrict,”report(KansasCity,MO:FederalReserveBankofKansasCity,May),www.kansascityfed.org/ publicat/research/community/Unbanked.Report.pdf. Use of Alternative Financial Services Previousstudieshaveshownthattheunderbankedandunbankedaremorelikelytouse alternativefinancialserviceproviders,suchascheckcashers;payday,title,andpawnlenders;orrent-to-ownservices,eventhoughalternativefinancialserviceprovidersareoftenin
114 FederalReserveBulletin|September2012 Table1.Samplecharacteristics Percent,exceptwherenoted Fullsample Fullybanked Underbanked Unbanked Observations 100 78 11 11 Income Lessthan$25,000 21.5 15.6 24.4 60.8 $25,000–$39,999 17.3 16.6 25.3 13.6 $40,000–$74,999 26.2 28.6 22.2 13.4 $75,000–$99,999 12.9 14.2 12.2 4.8 $100,000ormore 22.0 24.9 15.8 7.4 Age Averageage(inyears) 46.6 47.9 44.8 39.2 Medianage(inyears) 47.0 48.0 43.0 39.0 Agecategories 18–29 21.4 19.8 19.0 36.0 30–44 26.0 24.6 33.1 27.3 45–60 27.6 27.2 28.2 29.1 Over60 25.1 28.4 19.7 7.6 Education Lessthanhighschool 12.7 9.4 11.8 35.7 HighschoolorGED 30.4 28.5 34.4 39.0 Somecollege 28.8 29.9 31.3 18.5 Bachelor’sdegreeorhigher 28.2 32.2 22.6 6.8 Gender Female 51.6 50.8 60.6 48.4 Male 48.4 49.2 39.4 51.6 MaritalStatus Married 52.8 57.2 48.4 25.7 Widowed 4.2 4.3 * 5.2 Divorced 10.5 9.6 16.4 10.4 Separated 1.7 1.1 * 5.2 Nevermarried 21.0 18.1 19.4 42.8 Livingwithpartner 9.9 9.6 11.1 10.8 Race/ethnicity White,non-Hispanic 67.9 74.0 57.0 37.2 Black,non-Hispanic 11.6 7.8 20.7 29.0 Other,non-Hispanic 5.6 5.4 5.0 8.6 Hispanic 13.7 11.9 16.1 22.9 2ormoreraces,non-Hispanic 1.2 1.0 * * Employmentstatus Workingasapaidemployee 48.7 50.2 54.7 31.8 Self-employed 6.9 6.9 8.4 4.9 Ontemporarylayofffromajob 1.2 0.9 0.7 4.2 Lookingforwork 8.5 5.9 6.0 28.3 Retired 17.3 20.3 10.3 * Disabled 8.0 6.1 12.4 17.7 Other 9.3 9.7 7.4 9.3 Region Northeast 18.4 19.6 14.9 14.3 Midwest 21.7 21.6 25.1 19.9 South 36.6 35.1 42.9 40.6 West 23.2 23.8 17.1 25.2 Ownhome 70.2 75.8 60.0 41.5 Housesize Meannumberofpersons 2.8 2.7 3.0 3.0 Mediannumberofpersons 2 2 2 3 Proportionofhouseholdswithchildunder18 35.8 33.9 42.9 43.1 *Tenorfewerobservations.
Useof FinancialServicesbytheUnbankedandUnderbanked 115 Table2.Experiencewithalternativefinancialservices Percent Fullsample Fullybanked Underbanked Unbanked Credit Usepaydayloanever 11.2 6.0 42.6 15.5 Usedpaydayloaninlast12months 29.9 * 64.2 16.3 Useautotitleloan 3.6 * 29.5 * Uselayaway 3.8 * 28.8 5.4 Payments Usecheckcasher 4.1 * 26.8 10.1 Prepaidcards Giftcard 48.0 51.5 48.8 22.0 General-purposecard 14.5 13.2 17.9 20.6 Payrollcard 1.7 * 8.4 6.6 Governmentcard 4.8 3.2 6.0 14.8 None 45.4 45.0 40.2 54.6 Reloadedprepaidcardinlast12months 59.7 33.3 53.7 65.1 Mostrecentreload Past7days 21.2 24.2 * * Past30days 41.1 35.4 53.3 44.6 Past90days 20.0 18.3 28.8 * Past12months 17.1 21.1 * * Morethan12monthsago * * * * *Tenorfewerobservations. thesameneighborhoodsasfinancialinstitutions.12ResponsestotheSCMFSareconsistent withtheseotherstudies.Two-fifthsof underbankedhouseholdshadusedapaydayloan;of these,two-thirdshadusedonewithinthepast12months(table2).Incomparison,only aboutoneoutof sixunbankedhouseholdshadeverusedapaydayloan;thisdroppedto oneinabouttwentyamongfullybankedhouseholds.Vehicletitleloansandlayawaywere usedlessfrequently;aboutthreeoutof tenunderbankedhouseholdsreportusingthese services. Theunderbankedarealsomorelikelythanotherstoreportusingcheckcashers;aboutone outof fourunderbankedrespondentsreportusingthistypeof service.Whileitmightseem surprisingthattheunbankeddonotmakemoreuseof checkcashers,thereissomeevidencethatthesehouseholdsavoidcheck-cashingfeesbycashingchecksatgrocerystores andsomelargeretailerswhenmakingpurchases.13 Theuseof prepaidcardshasgrownrapidlyoverthepastseveralyears.14General-purpose reloadableprepaidcardsusuallycarryoneof themajorpayment-cardnetworklogosand canactasasubstituteforatransactionaccountinthatfundsfromwages,taxrefunds,governmentbenefits,andothersourcescanbeloadedontothecards,whichthencanbeused forpaymentsonlineorinstores.Oneoutof sevenrespondentsreportusingageneral-purposereloadablecard,whilesubstantiallyfewerreportusinganemployer’spayrollcardor 12 FDIC,2011NationalSurvey;TimothyBatesandConstanceR.Dunham(2003),“IntroductiontoFocusIssue: UseofFinancialServicesbyLow-IncomeHouseholds,”EconomicDevelopmentQuarterly,vol.17(2),pp.3–7; andMattFellowesandMiaMabanta(2008),“BankingonWealth:America’sNewRetailBankingInfrastructureandItsWealth-BuildingPotential,”researchbrief(Washington:BrookingsInstitution,January),www .brookings.edu/~/media/research/files/reports/2008/1/banking%20fellowes/01_banking_fellowes.pdf. 13 MichaelS.Barr,JaneK.Dokko,andBenjaminJ.Keys(2009),“AndBankingforAll?”FinanceandEconomicsDiscussionSeriesWorkingPaperNo.2009-34(Washington:BoardofGovernorsoftheFederalReserve System,August). 14 JavelinStrategyandResearch(2012),“PrepaidCardsandProductsin2012:EnablingFinancialAccessfor UnderbankedandGenYConsumers,”report(Pleasanton,CA:JavelinStrategyandResearch).
116 FederalReserveBulletin|September2012 Table3.Financialcapabilitymeasures Percentrespondingcorrectly Fullsample Fullybanked Underbanked Unbanked Financialliteracyquestions1 Imaginethattheinterestrateonyoursavings accountwas1%peryearandinflationwas 2%peryear.After1year,howmuchwould youbeabletobuywiththemoneyinthis account? 70.4 74.8 65.5 44.7 Consideringalongtimeperiod(forexample 10or20years),whichassetnormallygives thehighestreturn? 55.8 60.9 46.4 29.9 Ifaninvestorwhoonlyownstwostocksright nowdecidestoinsteadspreadtheirmoney amongmanydifferentassets(i.e.,more stocks,addbonds,addrealestate),theirrisk oflosingmoneyontheirentireportfoliowill: 52.4 55.9 46.6 34.2 Ifyouweretoinvest$1,000inastockmutual fundforayear,itwouldbepossibletohave lessthan$1,000whenyouwithdrawyour money. 76.0 80.8 67.7 50.5 Supposeyouowe$1,000onaloanandthe interestrateyouarechargedis10%peryear compoundedannually.Ifyoudidn’tmakeany paymentsonthisloan,atthisinterestrate, howmanyyearswouldittakefortheamount youowetodouble? 34.2 37.7 28.7 14.1 Financialriskquestions2 Areyouwillingtotake: Substantialriskforsubstantialgain 3.4 3.4 * * Above-averageriskforabove-averagegain 15.0 16.3 14.8 6.3 Averageriskforaveragegain 37.9 42.4 30.9 13.4 Norisk 43.6 37.9 51.1 76.4 1 TheexactwordingofthefinancialliteracyquestionsandtheirpossibleresponsesisprovidedinappendixB.Correctanswersarebolded. 2 Forfinancialriskquestions,percentofaffirmativeresponses. *Tenorfewerobservations. sometypeof governmentbenefitscard.Underbankedandunbankedrespondentsaremore likelytoreportusingthesereloadablecardsthanfullybankedrespondents. Amongthosewhousedreloadablecards,half theunderbankedandtwo-thirdsof the unbankedreportreloadingfundsontotheircards.Thehighestproportionreportdoingthis withinthepast30days,consistentwithgovernmentbenefitspaymentsandsomeemployer paycycles. Measures of Financial Capability Thesurveyalsotestedthefinancialknowledgeof respondentswithacommonlyusedsetof questionspertainingtointerestrates,inflation,returnonassets,portfoliodiversity,mutual funds,andrepaymentmethods(table3;seeappendixBforfulltextof financialliteracy questions).15Unbankedhouseholdswerelesslikelytogivecorrectanswersthanunderbankedorfullybankedhouseholds. Fewerthanhalf of theunbankedrespondentscorrectlyansweredaquestionaboutinflation,comparedwithtwo-thirdsof theunderbankedrespondentsandthree-fourthsof the fullybankedrespondents.Aboutthreeoutof tenunbankedhouseholdscorrectlyanswered 15 AnnamariaLusardiandPeterTufano(2009),“DebtLiteracy,FinancialExperiences,andOverindebtedness,” NBERWorkingPaperNo.14808(Cambridge,MA:NationalBureauofEconomicResearch,March);and AnnamariaLusardi,OliviaS.Mitchell,andVilsaCurto(2010),“FinancialLiteracyamongtheYoung,”JournalofConsumerAffairs,vol.44(2),pp.358–80.
Useof FinancialServicesbytheUnbankedandUnderbanked 117 aquestionaboutrelativeratesof returnonsavingsaccounts,governmentbonds,and stocks,comparedwithabouthalf of theunderbankedandthree-fifthsof thefullybanked. Finally,abouthalf of theunbankedhouseholdscorrectlyansweredaquestionaboutthe risksassociatedwithinvestinginstockmutualfunds(thatis,onecouldlosesomeof the principle).Incomparison,two-thirdsof theunderbankedhouseholdsandfour-fifthsof the fullybankedhouseholdscorrectlyansweredthisquestion. Unbankedrespondentswerethemostrisk-averseamongthethreegroups;three-fourthsof themwereunwillingtotakeanyfinancialrisk,comparedwithhalf of theunderbanked respondentsandjustoverone-thirdof thefullybankedrespondents.Thisriskaversionmayberelatedtolackof experiencewitharangeof financialproductsandservices, andlackof experiencemayexplain,inpart,whytheunbankedscoredlowrelativetoother respondentsonthefinancialcapabilityquestions.Thegreaterriskaversionamongthe unbankedmayalsoreflectthefactthatlow-incomeindividualshavelittle,if any,marginfor errororlossintheirfinances. Mobile Phone Ownership and Use Thesurveyexaminedrespondents’ownershipanduseof mobilephonesaswell.Overall, 87percentof respondentstotheSCMFSsaidtheyhadamobilephone(table4).The unbankedarelesslikelytohaveamobilephonethantheirunderbankedorfullybanked counterparts.Amongtheunbanked,63percenthaveamobilephonecomparedwith 91percentof theunderbankedand90percentof thefullybanked. Amongmobilephoneowners,morethantwo-fifthshavesmartphones.16Underbanked householdsaremorelikelythantheirunbankedandfullybankedcounterpartstohave smartphones.Amongunderbankedhouseholdswithmobilephones,57percenthavesmartphonescomparedwith26percentof unbankedand44percentof fullybankedhouseholds (seebox2,“SmartphoneAdoption”). Potential for Mobile Financial Services to Reach Underserved Consumers AlthoughconsumersintheUnitedStateshavebeenslowtoadoptmobilefinancialservices, theexperiencesof somedevelopingcountriesofferaglimpseof thepotentialbenefitsthat usingmobilephonestoconducttransactionsandaccessservicescanbringtounderserved populationsaswellastothefinancialsystem.17 Globally,Kenyaisaleaderinmobilepaymentsimplementationandadoption.Kenyahas receivedsubstantialinternationalattentionfortheextenttowhichtheM-PESAservicehas promotedfinancialinclusionthroughmobilebankingandpayments.WorldBankFindex Datarevealsthat60percentof Kenyanadultsovertheageof 15usemobilepaymentsto sendmoney,and66percentusemobilepaymentstoreceivemoney.Amongthe144countriessurveyed,theuseof mobilefinancialservicesinKenyawas20percentagepoints higherthaninanyothercountry.18Arecentstudyof Kenyarevealsthatin2011,nearly 16 Thisarticleusessmartphonetorefertomobilephonesthatcanaccesstheweb,sende-mails,andinteractwith computersandfeaturephonetorefertomoretraditionalmobilephonesthatlacksuchcapabilities. 17 CatherineJ.Bell,JeanneM.Hogarth,andEricRobbins(2009),“U.S.HouseholdsAccesstoandUseofElectronicBanking,1989–2007,”FederalReserveBulletin,vol.97,pp.A99–A121,www.federalreserve.gov/pubs/ bulletin/2009/pdf/OnlineBanking09.pdf. 18 AsliDemirguc-KuntandLeoraKlapper(2012),“MeasuringFinancialInclusion:TheGlobalFindexDatabase,”WorldBankPolicyResearchWorkingPaper6025(Washington:WorldBank).
118 FederalReserveBulletin|September2012 Table4.Mobilephoneownershipandmobilebanking Percent Fullsample Fullybanked Underbanked Unbanked Havemobilephone 87.1 89.7 91.4 63.4 Smartphone 43.9 43.9 56.9 26.3 Featurephone 55.9 55.9 43.1 73.3 Usemobilebanking—allmobilephoneusers Now 20.9 20.8 28.4 9.7 Innext12months 11.3 9.0 22.4 18.7 Ever 17.0 16.6 25.5 11.3 Usemobilebanking—smartphoneowners Now 42.0 42.7 44.3 * Innext12months 22.9 20.1 35.3 * Ever 27.3 25.4 39.2 * Usemobilebanking—featurephoneowners Now 4.3 3.9 * * Innext12months 5.9 3.9 12.4 15.8 Ever 13.2 13.5 17.4 * Usedmobilebankingfor Checkbalanceinaccount 90.1 90.6 88.6 91.3 Downloadbankapp 48.1 49.8 43.1 * Transfermoneybetweenaccounts 41.7 38.9 54.9 * Setuptextmessagealert 33.4 35.7 30.0 * Low-balancealert 66.4 65.3 71.5 * Paymentduealert 31.7 32.1 * * Savingsreminder * * * * Fraudalert 30.3 30.9 * * Actionafterreceivingalert Transferredmoneyintoaccount 57.6 58.7 * * Depositedmoneyintoaccount 16.3 * * * Reducedspending 41.2 45.4 * * Paymentalertsimprovedpayingontime Yes,byalot 37.3 30.6 * * Yes,byalittle 40.5 43.7 * * No * * * * Satisfactionwithmobilebanking Verysatisfied 63.7 62.7 60.8 97.4 Somewhatsatisfied 33.0 33.5 37.8 * Somewhatdissatisfied * * * * Verydissatisfied * * * * *Tenorfewerobservations. $10billion—about30percentof Kenya’sGDP—wastransferredthroughmobilepayments.19Morethan20othercountriesreporthavingastrategyformobilebankingand paymentsaspartof theinnovationsintheirpaymentsystems.20 Theinternationalsuccessof themicrofinanceindustryindevelopingnationshasdemonstratedthatwithappropriateproductsandservices,eventhoseindividualsinextremepovertycanbebankable.21InIndia,mobilefinancialservicesareviewedasameansof extendingfinancialaccesstotheroughly43percentof thepopulationwhoareunbanked,with 19 AnjanaRaviandEricTyler(2012),“SavingsforthePoorinKenya,”reportbytheSavingsforthePoorInnovationandKnowledgeNetwork(Washington:NewAmericanFoundation,May). 20 BankforInternationalSettlements(2012)“InnovationsinRetailPayments,”CommitteeonPaymentand SettlementSystems,www.bis.org/publ/cpss102.pdf. 21 JanineFirpo(2005),“BankingtheUnbanked:Technology’sRoleinDeliveringAccessibleFinancialServicesto thePoor,”SEMBAConsulting,www.sevaksolutions.org/docs/Banking%20the%20Unbanked.pdf.
Useof FinancialServicesbytheUnbankedandUnderbanked 119 Box 2. Smartphone Adoption IntheSurveyofConsumersandMobileFinancialServices(SCMFS),asmartphoneis definedas“amobilephonewithfeaturesthatmayenableittoaccesstheweb,send e-mails,andinteractwithcomputers.SmartphonesincludetheiPhone,BlackBerrys,as wellasAndroidandWindowsMobilepowereddevices.”Datafromthesurveyare comparedwithresultsfromrelevantreportsbythePewResearchCenterandJavelinStrategyandResearch.1 Approximately87percentofrespondentstotheSCMFShavemobilephones,compared with83percentinthePewsurveyand85percentintheJavelinsurvey.Ofrespondents whohavemobilephones,approximately44percenthavesmartphones,comparedwith 42percentinthePewstudyand45percentintheJavelinstudy. Amongsmartphoneowners,51percentarewomen.Smartphoneownerstendtobe youngerthantheoverallpopulation:32percentofsmartphoneownersarebetweenages 18and29,35percentarebetweenages30and44,22percentarebetweenages45 and59,and11percentareage60andover. Theracialcompositionofsmartphoneownersreflectsthatoftheoverallpopulationexcept thatHispanicsareslightlymorelikelytoownsmartphones.Amongsmartphoneowners, 65percentarewhite,12percentareblack,16percentareHispanic,and6percentare classifiedasother. Smartphoneownersseemtohavehighereducationalattainmentthantheoverallpopulation:28percenthaveahighschooldegreeorless,while33percenthavecompletedsome collegeand39percenthaveabachelor’sdegreeorhigher. Smartphoneownersalsohavehigherincomes.Amongsmartphoneowners,12percent earnlessthan$25,000ayear;14percentearnbetween$25,000and$39,999;26percent earnbetween$40,000and$74,999;14percentearnbetween$75,000and$99,999;and 33percentearn$100,000ormoreayear. 1 AaronSmith(2011),“SmartphoneAdoptionandUsage,”report(Washington:PewResearchCenter,July),http:// pewinternet.org/~/media//Files/Reports/2011/PIP_Smartphones.pdf;andJavelinStrategyandResearch(2011), “MobileBanking,SmartphoneandTabletForecast2011–2016:MobileBankingMovesMainstreamtoMid-Sized, CommunityBanks,andCreditUnions,”report(Pleasanton,CA:JavelinStrategyandResearch). telecomcompaniesandbanksworkingtogethertooffernewservices,suchasmobilesavingsaccountsorremittancepayments.22 However,thechallengesof manydevelopingcountrieshavebeenuniqueinthat,inmany cases,nophysicalbankingorpaymentsinfrastructureexistedinthefirstplace,making bankinginremoteareasmoredifficult.Inthesecountries,mobilefinancialservicesarefillingavoid.FortheUnitedStates,thepresenceof alongstandingbankingandpayments infrastructuremaymeandifferentchallengesinthediffusionof mobilefinancialservices.23 Ninety-twopercentof thetop25financialinstitutionsbydepositsalreadyoffermobile bankingservices,while17percentof creditunionsand15percentof communitybanks offermobilebanking,althoughtheprevalencevarieswiththesizeof theinstitution.24As thecomfortlevelwithmobilefinancialservicesamongtheunbankedandunderbanked 22 “Airtel,AxisBankJoinHandsforMobileBanking,”(2012)TimesofIndia,May16, www.timesofindia.indiatimes.com/business/india-business/Airtel-Axis-Bank-join-hands-for-mobilebanking/pmarticleshow/13174195.cms?prtpage=1. 23 DarinContini,MarianneCrowe,CynthiaMerritt,RichardOliver,andSteveMott(2011),“MobilePayments intheUnitedStates:MappingOuttheRoadAhead,”report(Atlanta:FederalReserveBankofAtlanta),www .frbatlanta.org/documents/rprf/rprf_pubs/110325_wp.pdf. 24 JavelinStrategyandResearch(2011),“2011MobileBankingFinancialInstitutionScorecard:MoneyBeginsto MoveonMobile,”report(Pleasanton,CA:JavelinStrategyandResearch);andIndependentCommunity
120 FederalReserveBulletin|September2012 increases,theuseof newandinnovativewaystoreachthesemarginalizedpopulationscreatesopportunitiesfornewrelationshipswithfinancialinstitutions. Use of Mobile Banking and Payments Althougha“digitaldivide”incomputerInternetaccessstillexistsacrossthesocioeconomicspectrumintheUnitedStates,thisdivideissignificantlynarrowerformobilephone access.25Asnotedearlier,ahighproportionof unbankedandunderbankedrespondentsto theSCMFSreporthavingmobilephones(63percentand91percent,respectively).The underbanked,inparticular,alreadymakesubstantialuseof servicessuchasmobilebankingandmobilepayments. Mobile Banking Inthesurvey,mobilebankingwasdefinedasusing“amobilephonetoaccessyourbank account,creditcardaccount,orotherfinancialaccount.Thiscanbedoneeitherbyaccessingyourbank’swebpagethroughthewebbrowseronyourmobilephone,viatextmessaging,orbyusinganapplicationdownloadedtoyourmobilephone.”Nearly21percentof themobilephoneownerssaytheyhaveusedsomeformof mobilebankinginthepast 12months,andanother11percentexpecttousemobilebankinginthenext12months. Mobilebankingishighlycorrelatedwithhavingasmartphone—42percentof smartphone ownersreportusingmobilebankingcomparedwith4percentof featurephoneowners. Underbankedhouseholdsaremorelikelythanotherstohaveusedmobilebanking(28percent,comparedwith10percentand21percentforunbankedandfullybankedrespondents, respectively).Also,ahigherproportionof underbankedrespondentsexpectstousemobile bankinginthenext12months—22percent,versus9percentof fullybankedand19percentof unbanked.Incomparison,morethantwo-thirdsof fullybankedandunderbanked respondentsreportusingonlinebankingwithapersonalcomputer(seebox3,“Internet AccessandOnlineBanking”). Whileitmayseemcounterintuitiveforunbankedhouseholdstousetheirphonesforbanking,theserespondentsmayhavehadabankaccountwithinthepast12months.Theymay bealsoreferringtousingtheirphoneswithanotherfinancialaccount,suchasaprepaidor payrollcard. Acrossalllevelsof banking,nineoutof tenmobilebankingrespondentsusetheirphones tocheckbalancesandrecenttransactionsintheiraccounts,themost-frequentlyreported mobilebankingtask.Thenextmost-frequentuse,reportedbyfewerthanhalf therespondents,istodownloadabank“app”totheirphones.Abouthalf of fullybankedrespondentsreportdownloadinganapp,comparedwithabouttwo-fifthsof underbankedrespondents.Morethanhalf of theunderbankedrespondentsreportusingmobilebankingto transferfundsbetweenaccountscomparedwithnearlytwo-fifthsof fullybanked respondents. Consumerswhousemobilebankinggenerallyaresatisfiedwiththeirmobilebankingexperience.Theunbankedarethemostsatisfiedwiththeirmobilebankingexperience:closeto 100percentreportbeingverysatisfied.Theunderbankedandfullybankedhavesimilarsatisfactionlevelswiththeirmobilebankingexperience:aboutthree-fifthsreportbeingvery BankersofAmerica(2010),2010ICBACommunityBankTechnologySurvey,(Washington:ICBA),www.icba .org/files/ICBASites/PDFs/2010TechnologySurveyResults.pdf. 25 AaronSmith(2011),“SmartphoneAdoptionandUsage,”report(Washington:PewResearchCenter,July), http://pewinternet.org/~/media//Files/Reports/2011/PIP_Smartphones.pdf.
Useof FinancialServicesbytheUnbankedandUnderbanked 121 Box 3. Internet Access and Online Banking Ninety-sixpercentofrespondentstotheSurveyofConsumersandMobileFinancialServicesreportregularaccesstotheInternet,andfouroutoffivereportaccessingtheInternet athome(seetableA).1Thosewithbankaccountswerealsoaskediftheyusedonline bankingwithadesktop,laptop,ortabletcomputerinthepast12months;two-thirdsofthe fullybankedandunderbankedreportusingonlinebanking. Resultsfrompreviousphone-basedsurveysshowasmallerpercentageofrespondents withregularInternetaccess,generallyrangingbetween71and78percentofthepopulation.2Despitethewidespreadadoptionofcomputers,tablets,andsmartphones,asignificantportionofconsumersdonothaveaccesstotheconvenienceofonlinebankingdueto thelackofregularInternetaccess.Moreover,thevulnerablegroupsthatcouldpotentially benefitfromreadieraccesstofinancialinstitutionsthroughtheInternetarethosewithlow ratesofInternetaccess.3 TableA.Internetaccessandonlinebanking Percent Fullsample Fullybanked Underbanked Unbanked HaveregularaccesstotheInternetathome orelsewhere 96.2 96.5 99.8 86.6 PlacewhereconsumerusestheInternetmostoften Home 81.4 80.6 80.4 85.8 Work 14.5 16.1 15.0 4.6 School 1.0 * * * Library 1.4 * * * Someoneelse’shome 0.9 * * * Useonlinebankingwithdesktop,laptop,or tabletcomputerinpast12months 67.8 67.9 68.7 * Note:AccessingtheInternetatschool,libraries,orsomeoneelse’shomewerementionedbyfewerthan10respondentsineachcategory; accessatInternetcaféswasmentionedbyfewerthan10respondents. *Tenorfewerobservations. 1 SeeappendixAforadetaileddiscussionofthesurveymethodologyandtherepresentativenessofthesample. 2 M.RebeccaBlankandE.LawrenceStrickling(2011),“ExploringtheDigitalNation,”report(Washington: DepartmentofCommerce),www.esa.doc.gov/sites/default/files/reports/documents/exploringthedigitalnationcomputerandinternetuseathome.pdf;andKathrynZickuhrandAaronSmith(2012),“DigitalDifferences,”report (Washington:PewResearchCenter,April),http://pewinternet.org/Reports/2012/Digital-differences/Overview.aspx. 3 ZickuhrandSmith,“DigitalDifferences.” satisfied,whileaboutone-thirdreportbeingsomewhatsatisfiedwiththeirexperience. Thesehighlevelsof satisfactionaresomewhatasexpected,giventhatconsumersarechoosingtousemobilebankingasacomplementtootheraccesschannels(seebox4,“Why Aren’tConsumersUsingMobileBankingandPayments?”). Text Messages Aboutone-thirdof allrespondentswhousemobilebankingalsousetextmessagealerts. Textmessageshavethepotentialtohelpconsumersmanagetheiraccountsbyalertingthem whenbalancesarerunningloworwhenbillpaymentsaredueandtoremindpeopleof savingsgoals.26Furthermore,textmessagesworkequallywellwithfeaturephonesaswith smartphones.Themostcommontextmessagealertthatrespondentshadsetupwasalowbalancealert—abouttwo-thirdsof allrespondentswhousetextmessaginghadsetupthis typeof alert.Aboutone-thirdhadalsosetupremindersforwhenbillpaymentswere due,andnearlyone-thirdreportsettingupfraudalerts. 26 DeanKarlanandJacobAppel(2011),MoreThanGoodIntentions(NewYork:PenguinBooks).
122 FederalReserveBulletin|September2012 Box 4. Why Aren’t Consumers Using Mobile Banking and Payments? Amongthoseindividualsinoursurveywhodonotusemobilebanking,butdohavea mobilephone,theprimaryreasonstheygavefornotusingmobilebankingwerethattheir bankingneedswerealreadybeingmetwithexistingservicesorthattheyhaveconcerns aboutthesecurity(seetableA).Reasonsfornotadoptingmobilebankingaresimilar betweenthefullybankedandunderbanked.Notsurprisingly,thereasonswhythe unbankedhavenotadoptedmobilebankingaresignificantlydifferentfromtheseothertwo groups.Themostcommonreasonfornotadoptingmobilebanking,listedby50percentof theunbanked,wassimplythattheydon’thaveabankaccount.Thisreasonwasfollowed bysecurityconcernsandlackoftrustinthetechnology(25percentand21percent, respectively). Amongthoserespondentswhodonotusemobilepayments,themostcommonlycited reasonswereconcernsaboutsecurity(42percent),notseeinganybenefitstousingmobile payments(37percent),andthatitwaseasiertopaywithanothermethodsuchascashor creditcards(36percent).Theprimaryreasonsfornotusingmobilepaymentsvariedwith bankingstatus.Whilesecuritywasconsistentlythenumberoneconcern,theunbanked indicatedsignificantlackoftrustinthetechnology(31percent)relativetotheunderbanked (16percent)andthefullybanked(19percent).Theunbankedalsocitedlackingthenecessaryfeatureonthephoneasamajorimpedimenttoadoption(29percent),asdidthefully banked(32percent).Theunderbankedwereleastlikelytoindicatethattheirphoneslacked thenecessaryfeaturetoperformmobilepayments,withonly21percentcitingthisreason. Thisisconsistentwiththeunderbankedhavingthehighestrateofsmartphoneownership amongthethreegroups.Lastly,theunbankedweretheleastlikelytoindicatethattheydid notseeanybenefitfromusingmobilepayments,with15percentcitingthisasareason theydonotusemobilepayments,relativeto30percentoftheunbankedand40percentof thefullybanked.Thismayindicatethattheunbankedareopentousingmobiletechnology asameansofperformingfinancialtransactions,providedtheirconcernsaboutthesecurity ofthetechnologyareaddressed. TableA.Reasonsfornotusingmobilebankingandmobilepayments Percent Fullsample Fullybanked Underbanked Unbanked Mobilebanking Bankingneedsalreadymet 57.5 63.0 57.5 10.2 Securityconcerns 48.0 50.3 51.6 25.2 Idon’ttrustthetechnology 21.8 21.5 25.5 20.7 Datacoststoohigh 18.3 20.0 16.8 * Toodifficulttoseemyphone’sscreen 16.6 16.5 21.9 12.0 Difficult/timeconsumingtosetup 9.5 8.8 13.2 12.3 Idon’thaveabankaccount 8.8 5.0 * 50.4 Notofferedbymybank/creditunion 2.7 3.0 * * Mybankchargesafeeformobilebanking 2.2 1.9 * * Mobilepayments Securityconcerns 41.5 42.7 38.1 36.2 Idon’tseeanybenefit 36.7 39.9 30.2 14.8 Easiertopayanotherway(forexample, cashorcreditcard) 36.0 37.0 36.3 25.2 Idon’thavethenecessaryfeatureonmy phone 30.8 32.4 20.9 29.4 Idon’ttrustthetechnology 19.8 19.3 15.5 30.6 Datacoststoohigh 15.3 16.0 15.4 8.5 Difficult/timeconsumingtosetup 9.1 7.4 18.3 11.5 Idon’tknowanystoresthatallowmobile payments 9.0 9.5 8.6 * Notofferedbymybank/creditunion 4.3 4.2 * * Mybankchargesafeeformobilepayments 1.9 2.0 * * *Tenorfewerobservations.
Useof FinancialServicesbytheUnbankedandUnderbanked 123 Respondentswhouselow-balancealertswereaskedwhatactionstheytookasaresultof receivinganalert.Responsesvariedbylevelof connectiontothebankingsystem.Fully bankedrespondentsreportthattheytransferredmoneyintotheiraccountsortheyreduced spending.Underbankedrespondentssaytheytransferredmoneyintotheaccountsor depositedmoneyintotheaccounts.Unbankedrespondentsreportthattheyreducedspendinginresponsetotheselow-balancealerts. Amongrespondentswhoreceivepayment-duealerts,three-fourthsreportthatthesealerts helpedthempaytheirbillsontime.Payingbillsontimehasthedoublebenefitof maintainingorimprovingconsumers’creditrecordsandsavingonlate-paymentfees.Virtually allof theunderbankedwhousepayment-duealertsreportimprovementsinpayingontime. Mobile Payments Inthesurvey,mobilepaymentsweredefinedas“purchases,billpayments,charitabledonations,paymentstoanotherperson,oranyotherpaymentsmadeusingamobilephone.You candothiseitherbyaccessingawebpagethroughthewebbrowseronyourmobiledevice, bysendingatextmessage(SMS),orbyusingadownloadableapplicationonyourmobile device.Theamountof thepaymentmaybeappliedtoyourphonebill(forexample,Red Crosstextmessagedonation),chargedtoyourcreditcard,orwithdrawndirectlyfromyour bankaccount.”Twelvepercentof respondentsusetheirmobilephonestomakesometype of payment;ahigherproportion,17percent,of underbankedhouseholdsreportusing mobilepayments(table5). Amongthosewhousemobilepayments,themostcommonusesarepayingabillonline (47percent),makinganonlinepurchase(36percent),andtransferringmoney(21percent). Person-to-persontransfersareusedbyonlyasmallproportionof respondents(8percent of thosewhousedmobilepayments).Higherproportionsof underbankedhouseholds reportusingmobilepaymentsservices. Table5.Paymentsusingmobilephones Percent Fullsample Fullybanked Underbanked Unbanked Usemobilepayments 12.3 11.6 17.4 12.2 Paidbillonlinewithmobile 47.1 44.9 61.7 * Madeonlinepurchase 36.0 37.3 32.3 * Transferredmoney 20.5 19.7 * * Receivedmoneyfromsomeoneelse 7.9 7.4 * * Madecharitabledonationbytexting 5.1 * * * Sentremittancetofamilyinanother country * * * * Paymentchannelformobilepayments Billedtocreditcard,debitedfrom prepaidcard 66.4 60.4 81.4 93.8 Debitedfrombankaccount 45.4 46.7 53.4 * PayPal,GoogleWallet,iTunes,etc. 21.9 20.2 * * Chargedtophonebill 8.4 9.5 * * Other * * * * Satisfactionwithmobilepayments Verysatisfied 59.4 63.6 45.5 * Somewhatsatisfied 35.4 32.5 45.2 * Somewhatdissatisfied * * * * Verydissatisfied * * * * *Tenorfewerobservations.
124 FederalReserveBulletin|September2012 Themajorityof mobilepaymentusers—60percentof thefullybanked,81percentof the underbanked,and94percentof theunbanked—reportthatthepaymentwaschargedtoa creditcardoraprepaidcard.Abouthalf of thefullybankedandunderbankedalsouse mobilepaymentsviaadebittoabankaccount.Approximatelyoneoutof fiveof allconsumersmakemobilepaymentsthroughathird-partyprovider,suchasPayPal,GoogleWallet,oriTunes. Consumers’satisfactionwiththeirmobilepaymentexperiencesismorevariablethantheir satisfactionwithmobilebanking.Morethanhalf of allrespondentsreportthattheyare verysatisfiedwiththeirexperiences,andanadditionalthirdreportthattheyaresatisfied withtheirexperience.However,satisfactionvariesacrossthegroups,withthefullybanked havingthehighestproportionsof veryorsomewhatsatisfiedrespondents(seebox4). Mobile Phones and Personal Financial Management Mobilephonescanprovideconsumerswithjust-in-timeinformationonaccountbalances andcreditlimits,whichinturncanaidinconsumerfinancialmanagementanddecisionmaking.Armedwiththisinformation,consumerscanavoidoverdrawingtheiraccountsor goingovertheircreditlimits,bothof whichmaytriggerfees.Smartphonesinparticularcan alsobeusedtoshopforproductsandservices,enablingconsumerstosavemoneybyfindinglowerpricesorproductsthatfitbetterwiththeirneeds. Abouthalf thesurveyrespondentsreportthattheyareresponsiblefor“allormost”of theirhousehold’sdecisionmakingwhenitcomestobudgetmanagement,payingbills,shopping,andsavingandinvesting.Slightlyhigherproportionsof underbankedrespondents claimthislevelof responsibility,comparedwithsubstantiallylowerproportionsof unbankedhouseholds(table6). Thosewhosaidtheyusedmobilebankingwereaskedif theyusedtheirmobilephonesto checkaccountbalancesoravailablecreditbeforemakingapurchase.Two-thirdsof these Table6.Mobilephones,shopping,andfinancialdecisionmaking Percent Fullsample Fullybanked Underbanked Unbanked Allormostoftheresponsibilityforthehousehold’s Budgetmanagement 49.3 50.8 58.3 39.9 Billpaying 52.9 54.8 60.4 31.9 Shopping 48.1 49.3 55.2 33.2 Savingandinvesting 41.7 42.1 49.2 32.3 Usemobiletocheckaccountbalanceor availablecreditbeforepurchase 67.2 64.6 76.9 66.9 Decidednottobuysomething 59.2 58.3 58.3 * Comparepricesonlinebeforegoingtostores 58.4 62.2 59.0 28.9 Lookatproductreviewsonlinebeforegoingto stores 57.6 62.0 57.2 24.7 Usemobiletocomparisonshopwhileatretail store 19.4 19.4 23.7 12.9 Usemobileforonlineshopping 16.4 16.2 22.3 9.4 Usemobiletoreadproductreviewswhileat retailstore 16.0 15.5 24.7 8.8 Changedwhichitemyoupurchased 76.9 75.6 86.2 * Usebarcodescanningtoshopforprices 12.3 11.7 20.2 * Changedwhereyoupurchased 65.6 65.7 71.2 * *Tenorfewerobservations.
Useof FinancialServicesbytheUnbankedandUnderbanked 125 respondentsreportusingtheirmobilephonestoobtainthistypeof information.Asa resultof learningabouttheirbalances,threeoutof fiverespondentssaytheydecidednot togoaheadwithapurchase. Allrespondentsinthesurveywereaskedif theycomparedpricesandlookedatproduct reviewsonlinebeforemakingamajorpurchase.Nearlythree-fifthsof therespondentsindicatetheydothistypeof onlinereviewandcomparison;theseactivitiesaremoreprevalent amongthefullybankedandunderbankedthanamongtheunbanked. Muchlowerproportions—generallybetweenoneoutof eightandoneoutof five—have usedtheirmobilephonestoshopeitheronlineorinaretailstore,withhigherproportions of underbankedrespondentsreportingtheseactivities.Amongallrespondents,oneoutof sixreportreadingproductreviewsinthestore;of those,asubstantialproportion(about three-fourths)saytheyhavechangedtheirmindsabouttheproducttheywerepurchasing asaresultof readingareview.Asmallerproportion,oneineight,reportusingbarcode scanningapplicationsontheirmobilephonestoshopforprices;amongthose,threefourthschangedwheretheypurchasedtheitem.Again,underbankedrespondentsaremore likelytousetheseshoppingactivitiesandmorelikelytoreportthattheinformationavailablethroughtheirmobilephoneschangedwhattheypurchasedorwheretheypurchasedit. Mobile Phones as a Channel for Financial Inclusion Thewidespreadownershipof mobilephonesbyunderbankedandunbankedconsumers suggeststhatprovidingafullsuiteof mobilefinancialservices(fordeposits,payments,and personalfinancialmanagementtools)maybeameanstofacilitatetheiraccessto,and inclusionin,themainstreamfinancialsystem.Thedataindicatethattheunbankedand underbankedcanbecharacterizedashavinglowerlevelsof educationandincome;being younger,minority,female,notmarried,andunemployed;andnotbeingwillingtotake risks.27Theunbankedarelesslikelytohaveamobilephonethantheirunderbankedand fullybankedcounterparts,andtheyarealsolesslikelythantheunderbankedtohavea smartphone. However,itisalsothecasethatconsumerswithcharacteristicsthattypifytheunbanked andunderbanked—lowerincome,younger,minority,female,notmarried,andunemployed—arehighlylikelytohavemobilephonesandmaybeopentousingthischannelfor financialservices(table7).Forexample,three-fifthsof unbankedrespondentswith incomeslessthan$25,000reportthattheyhaveamobilephone,andtwo-thirdsof unbankedrespondentsbetweenages18and29reporthavingamobilephone.Half of unbankedHispanicrespondentsandtwo-thirdsof unbankedAfricanAmericanrespondentshavemobilephones,and72percentof unbankedfemaleshaveamobilephone. Three-fifthsof unmarriedunbankedrespondentsandthree-fourthsof unbankedunemployedrespondentshavemobilephones.Thus,accesstothetechnologydoesnotseemtobe abarrier. Oneof themostcommonlycitedreasonsthatconsumersgivefornothavingabank accountisthatthey“don’tlikedealingwithbanks.”Mobilebankingmayprovidesufficient separationfrom“dealingwithbanks”thatconsumerscouldfeelcomfortableusingabank 27 Willingnesstotakerisksismeasuredusingthefinancialrisk-aversionquestionfromtheSurveyofConsumer Finances.Thequestionasks“Whichofthefollowingstatementscomesclosesttodescribingtheamountof financialriskthatyouarewillingtotakewhenyousaveormakeinvestments?”Thefourpossibleresponsesare (1)“Takesubstantialfinancialrisksexpectingtoearnsubstantialreturns”;(2)“Takeaboveaveragefinancial risksexpectingtoearnaboveaveragereturns”;(3)“Takeaveragefinancialrisksexpectingtoearnaverage returns”;and(4)“Notwillingtotakeanyfinancialrisks.”
126 FederalReserveBulletin|September2012 Table7.Selectconsumergroupsandtheiraccesstomobilephones Percent Fullsample Fullybanked Underbanked Unbanked Incomelessthan$25,000 74.6 81.0 76.2 62.2 Age18–29 91.2 96.1 98.7 67.7 Hispanic 81.3 88.8 87.8 49.3 Black,non-Hispanic 85.1 92.4 89.5 67.1 Female 89.2 91.0 92.4 71.8 Notmarried 83.5 87.8 87.4 62.7 Unemployed 86.0 92.5 81.0 76.7 account(seebox1).Anothercommonreasonfornothavinganaccountisthatconsumers “don’twriteenoughcheckstomakeitworthwhile”;mobilebankingandmobilepayments allowfortransferringfundsorpayingbillswithoutwritingchecks. Thethirdmost-citedreasonfornothavinganaccountisthat“feesandservicechargesare toohigh.”Somefinancialinstitutions,however,areexaminingwhetheremergingtechnologiessuchasmobilebankinghavethepotentialtoreducecosts.And,thefinancialinteractionthatmobilebankingwouldprovidemaybeparticularlybeneficialtobudget-conscious consumers.Forexample,theuseof textalertshasthepotentialtohelpconsumersmanage theirfinanceswithremindersaboutwhenbillsaredueorwarningsaboutlowbalancesthat maytriggeranoverdraft.Sincemanyunbankedconsumersalsomakeuseof general-purposereloadablecards(seetable2),usingamobiledevicetotrackbalancesonthesecards— perhapsinconjunctionwithtextalerts—couldproveusefultotheseconsumers. Otherconcernsthatunbankedconsumersraisedwiththeuseof mobilebankingand mobilepaymentswereissuessurroundingsecurityandtrustinthetechnology.Suchissues needtobeaddressedif unbankedandunderbankedconsumersaretoadoptmobilebankingandpayments.Financialserviceprovidersmaywanttoconsiderdevelopingasimple customersecuritytoolkitshowingconsumershowtoprotecttheirmobiledevicesandpaymentsdatabycreatingpasswordsforloginandaccess;usingantivirussoftwaretoensure theapplicationsdownloadedaresafefromvirusesandmalware;loadingsoftwarethat enablesthephonetoberemotelywiped,locked,ordeactivatedif lostorstolen;and encouragingmoreconsumerstosetupfraudalerts. Conclusion Theanalysisof theFederalReserveBoard’sSCMFSpresentedheresuggeststhatmobile technologiesofferthepotentialtobetterintegratetheunbankedandunderbankedintothe mainstreamfinancialsystem.Substantialmajoritiesof boththeunbankedandunderbankedhavemobilephones,andsignificantshareshavesmartphones.Thus,evenif consumersaren’tlocatednearabankorcreditunionbranch,mobilebankingtechnology couldallowtheseconsumerstoperformmanyfinancialtransactionsthroughtheirphones. Moreover,withtheemergenceof thesetechnologies,somefinancialinstitutionsareexploringwhethertheycanrealizesufficientcostsavingsandbettermeettheneedsof the unbanked.Becausethetechnologyandbusinessmodelsaresonewandstillevolving,itis uncleartowhatextentmobileservicesmayultimatelycomplement,augment,orsupplantmoretraditionalmeansof deliveringfinancialservicestoconsumers,includingconsumerswithoutbankingrelationshipsandthosewhoarebankedbutalsousealternative financialservices.
Useof FinancialServicesbytheUnbankedandUnderbanked 127 Appendix A: Survey Data Collection Inconsultationwithamobilefinancialservicesadvisorygroupcomposedof keyFederal ReserveSystemstaff,theConsumerResearchSectionintheFederalReserveBoard’sDivisionof ConsumerandCommunityAffairsdesignedasurveyinstrumenttoexamineconsumers’usageof andattitudestowardsmobilephonesandmobilefinancialservices. ThesurveywasadministeredbyGfKKnowledgeNetworks,anonlineconsumerresearch company,onbehalf of theBoard.Thesurveywasconductedusingasampleof adultsages 18andoverfromKnowledgePanel®,aproprietary,probability-basedwebpanelof more than50,000individuals.TheKnowledgePanelisdesignedtobestatisticallyrepresentative of theentireU.S.population.Until2009,thepanelwasselectedusinglist-assistedrandom digitdialingmethods.However,asmoreU.S.householdsbecamemobile-onlyhouseholds, KnowledgeNetworksswitchedtoaddress-basedsampling(ABS).ABSusestheU.S.Postal ServiceDeliverySequenceFiletorandomlyrecruitparticipantstothepanel.If arandomly sampledhouseholddoesnothaveacomputerand/orInternetaccess,butiswillingtoparticipateinthepanel,KnowledgeNetworksprovidesthehouseholdwithacomputerand Internetatnocost. KnowledgeNetworkshasconductedresearchtodemonstratetherepresentativenessof its samplevisavisU.S.CensusBureaubenchmarks.28Otherresearchershaveshownsamples drawnfromtheKnowledgeNetworkspanelyieldsimilarestimatestothoseobtainedfrom alargerrandomdigitdialingsurvey.29Aswithanysurveymethod,thepossibilityof bias exists.Forexample,giventhatthisisanonlinesurveyaboutuseof mobilephonetechnology,onecouldconceiveof respondentspredisposedtotechnologyadoptionhavinggreater representationinoursample.However,thecomparabilityof ourestimatestothose obtainedinothersurveyssuggeststhatoursampledisplayslittleeffectsof bias. Thesurveyinstrumentwaspre-testedonasampleof 50respondents,andthefulldatacollectioneffortforthesurveybeganonDecember22,2011,andconcludedonJanuary9, 2012.Atotalof 3,382e-mailsolicitationstoparticipateinthesurveyweresentouttothe KnowledgePanel,andthesurveywaskeptopenuntil2,290individualshadcompletedthe survey,forasurveycompletionrateof 67.7percent.KnowledgeNetworkssente-mail reminderstonon-respondersondaysthreeandsixof thefieldperiodtopromptparticipation.Thesurveytookamediantimeof 15minutestocomplete. 28 J.MichaelDennis(2010),“KnowledgePanel:ProcessesandProceduresContributingtoSampleRepresentativenessandTestsforSelf-SelectionBias,”researchnote(MenloPark,CA:KnowledgeNetworks,Inc.),http:// knowledgenetworks.com/ganp/docs/KnowledgePanelR-Statistical-Methods-Note.pdf.SeealsoDonA.Dillman,Ulf-DietrichReips,andUweMatzat(2010)“AdviceinSurveyingtheGeneralPublicOvertheInternet,” InternationalJournalofInternetScience,vol.5(1),pp.1–4. 29 AlistofresearchintotherepresentativenessoftheKnowledgePanelisavailableathttp://knowledgenetworks- .com/ganp/reviewer-info.html.
128 FederalReserveBulletin|September2012 Appendix B: Financial Literacy Questions TheBoardincludedinitssurveyseveralquestionspertainingtointerestrates,inflation, returnonassets,portfoliodiversity,mutualfunds,andrepaymentperiodstogaugethe financialliteracyof respondents.Correctanswersareinbold. 1. Imaginethattheinterestrateonyoursavingsaccountwas1percentperyearandinflationwas2percentperyear.After1year,howmuchwouldyoubeabletobuywiththe moneyinthisaccount? a. Morethantoday b. Exactlythesame c. Lessthantoday 2. Consideringalongtimeperiod(forexample10or20years),whichassetnormally givesthehighestreturn? a. Savingsaccounts b. U.S.Governmentbonds c. Stocks 3. If aninvestorwhoonlyownstwostocksrightnowdecidestoinsteadspreadtheir moneyamongmanydifferentassets(i.e.,morestocks,addbonds,addrealestate),their riskof losingmoneyontheirentireportfoliowill: a. Increase b. Decrease c. Staythesame 4. If youweretoinvest$1,000inastockmutualfundforayear,itwouldbepossibleto havelessthan$1,000whenyouwithdrawyourmoney. a. True b. False 5. Supposeyouowe$1,000onaloanandtheinterestrateyouarechargedis10percent peryearcompoundedannually.If youdidn’tmakeanypaymentsonthisloan,atthis interestrate,howmanyyearswouldittakefortheamountyouowetodouble? a. Lessthan2years b. Between2and5years c. 5to9years d. 10yearsormore
129 Federal Reserve BULLETIN December 2012 Vol. 98, No. 6 The Mortgage Market in 2011: Highlights from the Data Reported under the Home Mortgage Disclosure Act RobertB.Avery,NeilBhutta,KennethP.Brevoort,andGlennB.Canner,of theBoard’s Divisionof ResearchandStatistics,preparedthisarticle.NicholasW.HenningandShiraE. Stolarskyprovidedresearchassistance. Since1976,mostmortgagelendinginstitutionswithofficesinmetropolitanareashavebeen requiredundertheHomeMortgageDisclosureActof 1975(HMDA)todisclosedetailed informationabouttheirhome-lendingactivityeachyear.TheCongressintendedthat HMDAachieveitslegislativeobjectivesprimarilythroughtheforceof publicdisclosure.1 Theseobjectivesincludehelpingmembersof thepublicdeterminewhetherfinancialinstitutionsareservingthehousingneedsof theirlocalcommunitiesandtreatingborrowers andloanapplicantsfairly,providinginformationthatcouldfacilitatetheeffortsof public entitiestodistributefundstolocalcommunitiesforthepurposeof attractingprivateinvestment,andhelpinghouseholdsdecidewheretheymaywanttodeposittheirsavings.The datahavealsoproventobevaluableforresearchandareoftenusedinpublicpolicydeliberationsrelatedtothemortgagemarket. The2011HMDAdataconsistof informationreportedbymorethan7,600homelenders, includingallof thenation’slargestmortgageoriginators.Together,thehome-purchase, refinance,andhome-improvementloansreportedrepresentthemajorityof homelending nationwideandthusarebroadlyrepresentativeof allsuchlendingintheUnitedStates.2 TheHMDAdataincludethedispositionof eachapplicationformortgagecredit;thetype, purpose,andcharacteristicsof eachhomemortgagethatlendersoriginateorpurchaseduringthecalendaryear;thecensus-tractdesignationsof thepropertiesrelatedtothoseloans; loanpricinginformation;personaldemographicandotherinformationaboutloanapplicants,includingtheirraceorethnicityandincome;andinformationaboutloansales.3 OnJuly21,2011,rulemakingresponsibilityforHMDAwastransferredfromtheFederal ReserveBoardtothenewlyestablishedConsumerFinancialProtectionBureau.4Federal FinancialInstitutionsExaminationCouncil(FFIEC)continuestoberesponsibleforcollectingtheHMDAdatafromreportinginstitutionsandfacilitatingpublicaccesstothe 1 AbriefhistoryofHMDAisavailableatFederalFinancialInstitutionsExaminationCouncil,“HistoryofHMDA,” webpage,www.ffiec.gov/hmda/history2.htm. 2 ItisestimatedthattheHMDAdatacoverabout90to95percentofFederalHousingAdministrationlendingand between75and85percentofotherfirst-lienhomeloans.SeeU.S.DepartmentofHousingandUrbanDevelopment, OfficeofPolicyDevelopmentandResearch(2011),“ALookattheFHA’sEvolvingMarketSharesbyRaceandEthnicity,”U.S.HousingMarketConditions(May),pp.6–12,www.huduser.org/portal/periodicals/ushmc/spring11/ USHMC_1q11.pdf. 3 AlistoftheitemsreportedunderHMDAfor2011isprovidedinappendixA.The2011HMDAdatareflectproperty locationsusingthecensus-tractgeographicboundariescreatedforthe2000decennialcensus.The2012HMDAdata willusethecensus-tractboundariesconstructedforthe2010decennialcensus.Thus,inthisarticle,census-tractpopulationandhousingcharacteristicsreflectthegeographiesestablishedforthe2000censusdata. 4 ForinformationabouttheConsumerFinancialProtectionBureau,seewww.consumerfinance.gov.
130 FederalReserveBulletin|December2012 information.5InSeptemberof eachyear,theFFIECreleasessummarytablespertainingto lendingactivityfromthepreviouscalendaryearforeachreportinglenderaswellasaggregationsof home-lendingactivityforeachmetropolitanstatisticalarea(MSA)andforthe nationasawhole.6TheFFIECalsomakesavailabletothepublicadatafilecontainingvirtuallyallof thereportedinformationforeachlendinginstitution.7 Themainpurposeof thisarticleistodescribemortgagemarketactivityin2011andinpreviousyearsbasedontheHMDAdata.8Ouranalysisyieldsseveralkeyfindings: ‰ Thenumberof homeloansof alltypesreportedbycoveredlendersdeclinedbetween 2010and2011fromabout7.9millionloanstoslightlylessthan7.1millionloans.Refinanceloansfellmorethanhome-purchaseloans,althoughrefinancingssurgedtoward theendof 2011asinterestratesdropped.Thetotalof 7.1millionloansreportedin2011 isthelowestnumberof loansreportedintheHMDAdatasince6.2millionin1995. ‰ Government-backedloansoriginatedunderprogramssuchastheFederalHousing Administration(FHA)mortgageinsuranceprogramandtheDepartmentof Veterans Affairs(VA)loanguaranteeprogramaccountedforaslightlysmallershareof homepurchaseloansin2011relativeto2010butcontinuetomakeupahistoricallylargepart of theowner-occupanthome-purchasemortgagemarket,atnearly50percent. ‰ Despitethesurgeinthegovernment-backedshareof home-purchaseloans,whichhistoricallyhavegonetoborrowerswithrelativelylowcreditscores,analysisof creditrecord dataindicatethatcreditscoresof home-purchaseborrowersareconsiderablyhighernow thanatanypointinthepast12years.Themedianscoreof suchborrowershasrisen about40pointssincetheendof 2006,andthe10th-percentilescoreisupbyabout 50points. ‰ Ouranalysisof theHMDAdatasuggeststhat,attheretaillevel,themortgagemarket hasnotbecomemuchmoreconcentratedoverthepastfiveyears.The10mostactive organizationsaccountedforabout37percentof allfirst-lienmortgageoriginationsin 2011—onlyslightlyhigherthanthe35percentshareforthetop10organizationsin2006. ‰ Consistentwiththeoveralldeclineinhome-purchaseandrefinancelending,theHMDA datashowthatfrom2010to2011,allincomeandracialorethnicgroupsexperienceda dropinhome-purchaselending,althoughtheextentof thedeclinevariedsomeacross groups.Onlylow-incomeborrowersavoidedafallinrefinancelending. 5 TheFFIEC(www.ffiec.gov)wasestablishedbyfederallawin1979asaninteragencybodytoprescribeuniform examinationprocedures,andtopromoteuniformsupervision,amongthefederalagenciesresponsibleforthe examinationandsupervisionoffinancialinstitutions.ThememberagenciesaretheBoardofGovernorsofthe FederalReserveSystem,theConsumerFinancialProtectionBureau,theFederalDepositInsuranceCorporation,theNationalCreditUnionAdministration,theOfficeoftheComptrolleroftheCurrency,andrepresentativesfromstatebanksupervisoryagencies.UnderagreementswiththeseagenciesandtheDepartmentof HousingandUrbanDevelopment,theFederalReserveBoardcollectsandprocessestheHMDAdata. 6 Forthe2011data,theFFIECpreparedandmadeavailabletothepublic48,347MSA-specificHMDAreports onbehalfofreportinginstitutions.TheFFIECalsomakesavailabletothepublicsimilarreportsaboutprivate mortgageinsurance(PMI)activity.ThecostsincurredbytheFFIECtoprocesstheannualPMIdataandmake reportsavailabletothepublicarebornebythePMIindustry.AlloftheHMDAandPMIreportsareavailable ontheFFIEC’sreportswebsiteatwww.ffiec.gov/reports.htm. ThedesignationofMSAsisnotstatic.Fromtimetotime,theOfficeofManagementandBudgetupdatesthe listandgeographicscopeofmetropolitanandmicropolitanstatisticalareas.SeeOfficeofManagementand Budget,“StatisticalProgramsandStandards,”webpage,www.whitehouse.gov/omb/inforeg_statpolicy. 7 Theonlyreporteditemsnotincludedinthedatamadeavailabletothepublicaretheloanapplicationnumber, thedateoftheapplication,andthedateonwhichactionwastakenontheapplication. 8 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.A“final” HMDAdatasetreflectingthesechangesiscreatedtwoyearsfollowingtheinitialdatarelease.Thedatausedto preparethisarticlearedrawnfromtheinitialpublicreleasefor2011andfromthe“final”HMDAdatasetfor yearspriortothat.Consequently,numbersinthisarticlefortheyears2010andearliermaydiffersomewhat fromnumberscalculatedfromtheinitialpublicreleasefiles.
TheMortgageMarketin2011 131 ‰ TheHMDAdatasuggestthatlendingactivityhasnotyetreboundedinneighborhoods experiencinghighlevelsof distress.Infact,home-purchaselendingincensustractsidentifiedbytheNeighborhoodStabilizationProgram(NSP)asbeinghighlydistressed declinedbyalargerpercentagesince2010thansuchlendinginless-distressedtracts.This declinewasparticularlypronouncedforlower-andmiddle-incomeborrowersinthese neighborhoods. ‰ Theincidenceof higher-pricedlendingacrossallproductsin2011wasabout3.7percent, upfrom3.2percentin2010.Similartopatternsobservedinthepast,blackandHispanic-whiteborrowersweremorelikely,andAsianborrowerslesslikely,toobtain higher-pricedloansthanwerenon-Hispanicwhiteborrowers.Thesedifferencesaresignificantlyreduced,butnotcompletelyeliminated,aftercontrollingforlenderandborrowercharacteristics. ‰ Overall,loandenialratesin2011remainedvirtuallyunchangedfrom2010,atabout 23percentof allapplications.Denialratesvaryacrossloantypesandpurposes,and acrossapplicantsgroupedbyraceorethnicity,asinpastyears.TheHMDAdatadonot includesufficientinformationtodeterminetheextenttowhichthesedifferencesreflect illegaldiscrimination. ‰ Comparinghome-purchaseborrowerincomesreportedintheHMDAdatawithincome reportedbyhomebuyersinhouseholdsurveyssuggeststhatincomesonmortgageapplicationsmayhavebeensignificantlyoverstatedduringthepeakof thehousingboom.In morerecentyears,thereisnoevidenceof overstatedincomes. ‰ Thechangefromusingdatafromthe2000decennialcensus(Census2000)tousingdata fromthe2010censusandthe2006–10AmericanCommunitySurvey(ACS)asthebasis forderivingmedianfamilyincomewillaffecthowbankinginstitutionsfareinCommunityReinvestmentAct(CRA)performanceevaluations.Hadthenewcensus-tractrelative-incomeclassificationsbeenusedin2011,therewouldhavebeenanetincreasein mortgagelendingtolow-andmoderate-income(LMI)neighborhoodsof about 150,000loans,about22percenthigherthanthenumberof LMIloansin2011undercurrentcensus-tractrelative-incomeclassifications. A Profile of the 2011 HMDA Data For2011,atotalof 7,632institutionsreportedontheirhome-lendingactivityunder HMDA:4,497bankinginstitutions;2,017creditunions;and1,118mortgagecompanies, 812of whichwerenotaffiliatedwithabankinginstitution(thesecompaniesarereferredto inthisarticleas“independentmortgagecompanies”)(table1).Thenumberof reporting institutionschangessomefromyeartoyear.Someof thefluctuationisduetochangesin reportingrequirements,primarilyrelatedtoincreasesintheminimumassetlevelusedto determinecoverage.9Mergers,acquisitions,andfailuresalsoaccountforsomeof theyearover-yearchanges.Finally,periodicchangesinthenumberandgeographicfootprintsof metropolitanareasinfluencereportingovertime,asHMDA’scoverageislimitedtoinstitutionsthathaveatleastoneofficeinanMSA.For2011,thenumberof reportinginstitutionsfellnearly4percentfrom2010,continuingadownwardtrendsince2006,when HMDAcoverageincludedjustover8,900lenders.10 9 Forthe2012reportingyear(coveringlendingin2011),theminimumassetsizeforpurposesofcoveragewas $40million.TheminimumassetsizechangesfromyeartoyearwithchangesintheConsumerPriceIndexfor UrbanWageEarnersandClericalWorkers.SeetheFFIEC’sguidetoHMDAreportingatwww.ffiec.gov/ hmda/guide.htm. 10 Therewere138institutionsthatceasedoperationsanddidnotreportlendingactivityfor2011,butthesenonre-
132 FederalReserveBulletin|December2012 Table1.DistributionofreporterscoveredbytheHomeMortgageDisclosureAct,bytypeofinstitution, 2000–11 Number Depositoryinstitution Mortgagecompany Year Allinstitutions Banking Credit All Independent Affiliated1 All institution union 2000 4,721 1,691 6,412 981 332 1,313 7,725 2001 4,686 1,714 6,400 962 290 1,252 7,652 2002 4,698 1,799 6,497 986 310 1,296 7,793 2003 4,675 1,903 6,578 1,171 382 1,553 8,131 2004 4,962 2,030 6,992 1,317 544 1,861 8,853 2005 4,878 2,047 6,925 1,341 582 1,923 8,848 2006 4,846 2,037 6,883 1,334 685 2,019 8,902 2007 4,847 2,019 6,866 1,132 638 1,770 8,636 2008 4,855 2,026 6,881 957 550 1,507 8,388 2009 4,810 2,017 6,827 925 399 1,324 8,151 2010 4,677 2,041 6,718 848 371 1,219 7,937 2011 4,497 2,017 6,514 812 306 1,118 7,632 Note:Hereandinallsubsequenttables,componentsmaynotsumtototalsbecauseofrounding. 1 Subsidiaryofadepositoryinstitutionoranaffiliateofabankholdingcompany. Source:Hereandinsubsequenttablesandfigures,exceptasnoted,FederalFinancialInstitutionsExaminationCouncil,datareportedunderthe HomeMortgageDisclosureAct(www.ffiec.gov/hmda). Reporting Institutions by Size and Mortgage Lending Activity MostinstitutionscoveredbyHMDAaresmall,andmostextendrelativelyfewloans.For 2011,57percentof thedepositoryinstitutions(bankinginstitutionsandcreditunions)coveredbyHMDAhadassetsunder$250million,and76percentof themreportedinformationonfewerthan100loans(dataderivedfromtable2).Amongalldepositoryinstitutions, nearly55percentreportedonfewerthan100loans.Acrossdifferenttypesof lenders, mortgagecompaniestendtooriginatelargernumbersof loansonaper-reporterbasisthan theotherinstitutions(38percentof themortgagecompaniesreportedmorethan 1,000loans,ashareequaltoaboutsixtimesthatfordepositoryinstitutions). Intheaggregate,reportinginstitutionssubmittedinformationon11.7millionapplications forhomeloansof alltypesin2011(excludingrequestsforpreapproval),downabout 10percentfromthetotalreportedfor2010andfarbelowthe27.5millionapplicationsprocessedin2006,justbeforethehousingmarketdecline(dataderivedfromtable3.A).The majorityof loanapplicationsareapprovedbylenders,andmostof theseapprovalsresult inextensionsof credit.Insomecases,anapplicationisapprovedbuttheapplicantdecides nottotakeouttheloan;forexample,in2011,about5percentof allapplicationswere approvedbutnotacceptedbytheapplicant(datanotshownintables).Overall,about 60percentof theapplicationssubmittedin2011resultedinanextensionof credit(data derivedfromtables3.Aand3.B),asharelittlechangedfrom2010.Thetotalnumberof loansreportedin2011,7.1million(asshownintable3.B),wasabout10percentlowerthan in2010andisthelowestnumberof mortgageloansreportedunderHMDAsinceabout 6.2millionloanswerereportedin1995(datapriorto2000notshownintables). portingcompaniesaccountedforonly0.89percentofthe2010loanapplicationrecordssubmittedunder HMDA.
TheMortgageMarketin2011 133 Table2.Numberanddistributionofhomelenders,bytypeoflenderandbynumberofloans,2011 Typeoflender, Lessthan50 50–99 100–249 250–499 500–999 1,000ormore All andsubcategory (assetsize Percent Percent Percent Percent Percent Percent Percent inmillions Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsub- Num- ofsubofdollars) ber category1 ber category1 ber category1 ber category1 ber category1 ber category1 ber category1 Depositoryinstitution BankingInstitution Lessthan250 1,215 51.6 509 21.6 463 19.7 126 5.4 24 1.0 17 .7 2,354 100 250–499 231 24.9 131 14.1 317 34.2 173 18.6 56 6.0 20 2.2 928 100 500–999 106 17.7 61 10.2 120 20.0 150 25.0 119 19.9 43 7.2 599 100 1,000ormore 66 11.1 25 4.2 67 11.3 68 11.4 129 21.7 239 40.2 594 100 All 1,618 36.2 726 16.2 967 21.6 517 11.6 328 7.3 319 7.1 4,475 100 CreditUnion Lessthan250 783 58.5 301 22.5 207 15.5 36 2.7 11 .8 0 .0 1,338 100 250–499 42 13.9 52 17.2 111 36.6 70 23.1 25 8.3 3 1.0 303 100 500–999 16 7.8 14 6.9 49 24.0 58 28.4 48 23.5 19 9.3 204 100 1,000ormore 0 .0 4 2.4 13 7.9 28 17.1 40 24.4 79 48.2 164 100 All 841 41.9 371 18.5 380 18.9 192 9.6 124 6.2 101 5.0 2,009 100 Alldepositoryinstitutions Lessthan250 1,998 54.1 810 21.9 670 18.1 162 4.4 35 .9 17 .5 3,692 100 250–499 273 22.2 183 14.9 428 34.8 243 19.7 81 6.6 23 1.9 1,231 100 500–999 122 15.2 75 9.3 169 21.0 208 25.9 167 20.8 62 7.7 803 100 1,000ormore 66 8.7 29 3.8 80 10.6 96 12.7 169 22.3 318 42.0 758 100 All 2,459 37.9 1,097 16.9 1,347 20.8 709 10.9 452 7.0 420 6.5 6,484 100 Mortgagecompany2 All 185 17.0 68 6.2 133 12.2 135 12.4 149 13.7 419 38.5 1,089 100 Allinstitutions 2,644 34.9 1,165 15.4 1,480 19.5 844 11.1 601 7.9 839 11.1 7,573 100 1 Distributionsumshorizontally.Forexample,thesecondcolumn,firstrowshowsthat51.6percentofbankinginstitutionswithassetsofless than$250millionoriginatedlessthan50loansin2011. 2 Independentmortgagecompany,subsidiaryofadepositoryinstitution,oraffiliateofabankholdingcompany. TheHMDAdataalsoincludeinformationonloanspurchasedbyreportinginstitutions duringthereportingyear,althoughthepurchasedloansmayhavebeenoriginatedatany pointintime.For2011,lendersreportedinformationon2.9millionloansthattheyhad purchasedfromotherinstitutions,adeclineof nearly9percentfrom2010.Finally,lenders reportedonroughly186,000requestsforpreapprovalof home-purchaseloansthatdidnot resultinaloanorigination(table3.A);preapprovalsthatresultedinloansareincludedin thecountof loanextensionscitedearlier. Home-Purchase and Refinance Lending InJune2006,thepeakmonthforhome-purchaselendingthatyear,nearly712,000homepurchaseloanswereextended,comparedwithonly254,000suchloansinJune2011,the mostactivemonththatyear(figure1).11Onanannualbasis,thenumberof home-purchase loans(includingbothfirstandjuniorliens)reportedinHMDAin2011wasdownabout 5percentfrom2010andwas64percentlowerthanin2006(dataderivedfromtable3.B). Onefactorthatmayhelpexplainthedropinhome-purchaselendingbetween2010and 11 Lendersreportthedateonwhichtheytookactiononanapplication.Fororiginations,the“actiondate”isthe closingdateordateoforiginationfortheloan.Thisdateisusedtocompiledataatthemonthlylevel.Generally,theinterestrateonaloanissetatanearlierpoint,knownasthe“lockdate.”Theinterestrateseriesinthe figureisconstructedfromtheresultsofasurveyofinterestratesbeingofferedbylenderstoprimeborrowers. Sincealoan’spricinglikelyreflectstheinterestrateavailableatthetimeofthelockdate,thetimingoftheloan volumeandinterestrateseriesmaybeslightlymisalignedinthefigure.
134 FederalReserveBulletin|December2012 Table3.HomeloanactivityoflendinginstitutionscoveredundertheHomeMortgageDisclosureAct, 2000–11 A.Applications,requestsforpreapproval,andpurchasedloans Number Applicationsreceivedforhomeloans,bytypeofproperty 1–4family Requestsfor Year preapproval1 Purchasedloans Total Multifamily Home Home Refinance purchase improvement 2000 8,278,219 6,543,665 1,991,686 37,765 n.a. 2,398,292 19,249,627 2001 7,692,870 14,284,988 1,849,489 48,416 n.a. 3,767,331 27,643,094 2002 7,406,374 17,491,627 1,529,347 53,231 n.a. 4,829,706 31,310,285 2003 8,179,633 24,602,536 1,508,387 58,940 n.a. 7,229,635 41,579,131 2004 9,792,324 16,072,102 2,202,744 61,895 332,054 5,146,617 33,607,736 2005 11,672,852 15,898,346 2,539,158 57,668 396,686 5,874,447 36,439,157 2006 10,928,866 14,045,961 2,480,827 52,220 411,134 6,236,352 34,155,360 2007 7,609,143 11,566,182 2,218,224 54,230 432,883 4,821,430 26,702,092 2008 5,017,998 7,729,143 1,404,008 42,792 275,808 2,921,821 17,391,570 2009 4,216,589 9,982,768 831,504 26,141 216,865 4,301,021 19,574,888 2010 3,847,796 8,433,333 670,147 25,550 170,026 3,229,295 16,376,147 2011 3,630,284 7,390,690 686,788 35,048 185,943 2,944,662 14,873,415 Note:Hereandinsubsequenttables,exceptasnoted,dataincludefirstandjuniorliens,one-tofour-familyhomes(site-builtandmanufactured properties),andowner-andnon-owner-occupantloans. 1 Consistsofrequestsforpreapprovalthatweredeniedbythelenderorwereacceptedbythelenderbutnotactedonbytheborrower.Inthis article,applicationsaredefinedasbeingforaloanonaspecificproperty;theyarethusdistinctfromrequestsforpreapproval,whicharenot relatedtoaspecificproperty.Informationonpreapprovalrequestswasnotrequiredtobereportedbefore2004. n.a.Notavailable. 2011istheendingof thefirst-timehomebuyertaxcreditprograminApril2010.12The Table3.HomeloanactivityoflendinginstitutionscoveredundertheHomeMortgageDisclosureAct, 2000–11 B.Loans Number Loans,bytypeofproperty Year 1–4family Total Multifamily Homepurchase Refinance Homeimprovement 2000 4,787,356 2,435,420 892,587 27,305 8,142,668 2001 4,938,809 7,889,186 828,820 35,557 13,692,372 2002 5,124,767 10,309,971 712,123 41,480 16,188,341 2003 5,596,292 15,124,761 678,507 48,437 21,447,997 2004 6,429,988 7,583,928 966,484 48,150 15,028,550 2005 7,382,012 7,101,649 1,093,191 45,091 15,621,943 2006 6,740,322 6,091,242 1,139,731 39,967 14,011,262 2007 4,663,267 4,817,875 957,912 41,053 10,480,107 2008 3,119,692 3,457,774 568,287 31,509 7,177,262 2009 2,792,939 5,772,078 389,981 18,974 8,973,972 2010 2,546,590 4,968,603 341,401 19,168 7,875,762 2011 2,416,854 4,311,870 339,427 27,111 7,095,262 12 ThoseenteringintobindingcontractstopurchasetheirhomesbyApril30,2010,wereeligibleforthetaxcredit.
TheMortgageMarketin2011 135 first-timehomebuyertaxcredit Figure1.Volumeofhome-purchaseandrefinance programlikelystimulatedhomeoriginationsandaverageprimeofferrate,bymonth, buyinginthefirsthalf of 2010as 2006–11 individualssoughttopurchase theirhomesbeforethesunset Thousands of loans Percentage points date.13DatafromtheNational 800 7 APOR Associationof Realtors(NAR) (right scale) Refinance (left scale) supportthisview:TheNAR 600 annualsurveyof homebuyersand 6 sellersindicatesthatfirst-timebuyersaccountedforabout47percent 400 of allhomepurchasesin2009and 5 half of homesalesin2010before 200 fallingtoa37percentsharein Home purchase (left scale) 2011.14 0 4 Toagreaterextentthanforhome- 2006 2007 2008 2009 2010 2011 purchaseborrowing,thevolumeof refinancelendingovertimegener- Note:Thedataaremonthly.Loansarefirst-andsecond-lienmortgagesexcludingthoseformultifamilyhousing.Theaverageprimeofferrate(APOR)ispuballyfollowsthepathof interest lishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Itisan rates(typicallywithafairlyshort estimateoftheannualpercentagerateonloansbeingofferedtohigh-quality primeborrowersbasedonthecontractinterestratesanddiscountpoints lag),expandingasmortgagerates reportedbyFreddieMacinitsPrimaryMortgageMarketSurvey fallandretrenchingwhenratesrise. (www.ffiec.gov/ratespread/newcalc.aspx). Theinterestrateenvironmentover thepastfewyearshasgenerally beenquitefavorableforwell-qualifiedborrowerswhohavesoughttorefinance.Insome cases,thesameindividualshaverefinancedonmorethanoneoccasiontotakeadvantageof thedeclininginterestrateenvironment.However,manyotherindividualswithoutstanding loanshavenotbeenabletorefinance,eitherbecausetheycouldnotmeetincome-relatedor credit-history-relatedunderwritingstandardsorbecauseof collateral-relatedissues,includingsituationswheretheoutstandingbalanceontheloanexceedsthehomevalue.15 Comparedwith2010,thenumberof reportedrefinanceloansin2011wasdownabout 13percent(table3.B).Althoughthetotalvolumeof refinancingin2011wasdownquitea bitfrom2010,lendersexperiencedmuchhigherdemandinsomemonthsthanothers.In 2011,thepeakmonthforrefinanceissuancewasNovember,withnearly504,000loans, comparedwithonly230,000loansinMay(figure1).Thesurgeinrefinanceactivitytoward theendof 2011reflectsthesteadydropinmortgageratesoverthecourseof theyear,which byNovemberandDecembersawannualpercentageofferrateson30-yearfixed-rateloans diptoabout4percent. Formoreinformation,seeInternalRevenueService,“First-TimeHomebuyerCredit,”webpage,www.irs.gov/ newsroom/article/0,,id=204671,00.html. 13 Ouranalysisinanearlierarticlesuggestedthatone-halfofthehome-purchaseloansin2009qualifiedunder thefirst-timehomebuyertaxcreditprogram.SeeRobertB.Avery,NeilBhutta,KennethP.Brevoort,Christa Gibbs,andGlennB.Canner(2010),“The2009HMDAData:TheMortgageMarketinaTimeofLowInterest RatesandEconomicDistress,”FederalReserveBulletin,vol.96(December),pp.A39–A77. 14 SeeNationalAssociationofRealtors(2011),“NARHomeBuyerandSellerSurveyReflectsTightCreditConditions,”newsrelease,November11,www.realtor.org/news-releases/2011/11/nar-home-buyer-and-seller-surveyreflects-tight-credit-conditions. 15 SeeanalysisofthefactorsinfluencingrefinanceactivityinRobertB.Avery,NeilBhutta,KennethP.Brevoort, andGlennB.Canner(2011),“TheMortgageMarketin2010:HighlightsfromtheDataReportedunderthe HomeMortgageDisclosureAct,”FederalReserveBulletin,vol.97(December),pp.1–60.
136 FederalReserveBulletin|December2012 Non-Owner-Occupant Lending Individualsbuyinghomeseitherforinvestmentpurposesorassecondorvacationhomes areanimportantsegmentof thehousingmarketingeneral,andinsomeareasof thecountry,theyareparticularlyimportant.Inthecurrentperiodof highforeclosuresandelevated levelsof shortsales,investoractivityhelpsreducetheoverhangof unsoldandforeclosed properties.Insomecases,investorsorsecond-homebuyersareabletopurchasetheirpropertiesforcash;inothercases,theychoosetoborrowandfinancetheirpurchases.Surveys sponsoredbytheNARfindthatin2011,abouthalf of investorspaidcashfortheirpurchasesand42percentof vacation-homebuyerspaidcashfortheirproperties.16 TheHMDAdatahelpdocumenttheroleof non-owner-occupantlendingovertime.The datashowasharpincreaseinnon-owner-occupantlendingusedtopurchaseone-tofourfamilyhomes(site-builtandmanufacturedproperties)duringthefirsthalf of theprevious decade(table4).Thevolumeof non-owner-occupantlendingfellsharplybeginningin2007 andhasremainedatcomparablylowlevelsthrough2011.Althoughnon-owner-occupant lendingin2011remainedsubduedcomparedwithlevelsreachedinthemiddleof thepreviousdecade,suchlendingdidpickupfrom2010,increasingnearly10percent. Asshownintable4,thepost-2007declineinnon-owner-occupantlendinghasbeenmore severethanthatinowner-occupantlending.Between2000and2005,theshareof nonowner-occupantlendingusedtopurchaseone-tofour-familyhomesrose,increasingover thisperiodfromabout9percentto16percent(dataderivedfromtable4).17Thesharefell toabout11percentinboth2009and2010butreboundedto13percentin2011. Conventional versus Government-Backed Loans Althoughthetotalnumberof home-purchaseloanshasfallensubstantiallysince2005,virtuallyallof thedeclinehasinvolvedconventionallending;thevolumeof nonconventional home-purchaseloans(sometimesreferredtoas“governmentbacked”loans)—including loansbackedbyinsurancefromtheFHAorbyguaranteesfromtheVA,theFarmService Agency(FSA),ortheRuralHousingService(RHS)—hasincreasedmarkedlysincethe mid-2000s.From2006to2009,thetotalnumberof reportedconventionalhome-purchase loansfell77percent,whilethenumberof nonconventionalhome-purchaseloansmore thantripled(table4).Althoughthenumberof nonconventionalhome-purchaseloanshas fallensincereachingitshighmarkin2009,suchloansstillaccountedforabout43percent of home-purchaselendingin2011.Theincreaseinnonconventionallendinginrecentyears reflectsseveralfactors,suchasincreasedloan-sizelimitsallowedundertheFHAandVA lendingprogramsandreducedaccess(includingmore-stringentunderwritingandhigher prices)toconventionalloans,particularlythosethatallowtheborrowertofinancemore than80percentof thepropertyvalue.18 16 SeeUnitedPressInternational(2012),“InvestorPurchasesSoar65Percent,”UPI.com,March30, www.upi.com/Business_News/Real-Estate/News/2012/03/30/Investor-Purchases-Soar-65-Percent/ 9321333117717. 17 Researchusingcreditrecorddatasuggeststhatinstatesthatexperiencedthelargestrun-upinhomeprices, investorsaccountedforaboutone-halfofthehome-purchaseloans.SeeAndrewHaughwout,DonghoonLee, JosephTracy,andWilbertvanderKlaauw(2011),“RealEstateInvestors,theLeverageCycle,andtheHousing MarketCrisis,”FederalReserveBankofNewYorkStaffReports514(NewYork:FederalReserveBankof NewYork,September),www.newyorkfed.org/research/staff_reports/sr514.pdf. 18 Nonconventionalloansplayasmallroleincertainsegmentsofthehome-purchasemarket.Forexample,nonconventionalloansaccountedforlessthan1percentoftheloansextendedtonon-owneroccupantsforthepurchaseofahomein2011.Also,nonconventionalloansmadeuparelativelysmallshare(about24percent)of theloansusedtopurchasemanufacturedhomes(dataderivedfromtable5).
TheMortgageMarketin2011 137 Table4.Homeloanapplicationsandhomeloansforone-tofour-familyproperties,byoccupancystatus ofhomeandtypeofloan,2000–11 Number Applications Loans Owneroccupied Non-owneroccupied Owneroccupied Non-owneroccupied Year Non- Non- Non- Non- Conventional conventional1 Conventional conventional1 Conventional conventional1 Conventional conventional1 A.Homepurchase 2000 6,350,643 1,311,101 604,919 12,524 3,411,887 963,345 404,133 8,378 2001 5,776,767 1,268,885 627,598 19,688 3,480,441 1,003,795 440,498 14,128 2002 5,511,048 1,133,770 747,758 13,923 3,967,834 870,599 547,963 8,474 2003 6,212,915 1,014,865 943,248 8,623 4,162,412 761,716 667,613 4,560 2004 7,651,113 799,131 1,335,241 6,839 4,946,423 574,841 906,014 2,710 2005 9,208,214 610,650 1,850,174 3,814 5,742,377 438,419 1,199,509 1,707 2006 8,695,877 576,043 1,653,154 3,792 5,281,485 416,744 1,040,668 1,425 2007 5,960,571 599,637 1,044,112 4,823 3,582,949 423,506 655,916 896 2008 2,940,059 1,424,483 647,340 6,116 1,727,692 972,605 415,930 3,465 2009 2,017,982 1,966,335 442,409 6,711 1,174,648 1,323,966 290,560 3,765 2010 1,822,790 1,763,826 425,345 5,853 1,090,328 1,169,729 284,700 1,833 2011 1,791,526 1,558,447 461,481 4,768 1,076,446 1,025,827 313,138 1,443 B.Refinance 2000 6,051,484 110,380 379,299 2,502 2,170,162 64,882 198,695 1,293 2001 12,737,863 705,784 823,748 17,592 6,836,106 524,228 516,616 12,181 2002 15,623,327 742,208 1,111,588 14,504 9,058,654 535,370 706,570 9,377 2003 21,779,329 1,236,467 1,563,430 23,310 13,205,472 895,735 1,007,674 15,871 2004 14,476,350 497,700 1,084,536 13,516 6,649,588 304,591 621,667 8,082 2005 14,494,441 262,438 1,135,929 5,538 6,336,004 158,474 603,914 3,257 2006 12,722,112 208,405 1,112,891 2,553 5,382,950 122,134 585,142 1,016 2007 10,173,282 375,860 1,012,827 4,213 4,123,507 196,897 496,577 894 2008 5,829,633 1,240,472 650,042 8,996 2,593,793 522,243 337,914 3,824 2009 7,290,061 2,058,210 619,286 15,211 4,414,509 1,000,911 349,147 7,511 2010 6,325,488 1,449,925 642,401 15,519 3,948,746 655,574 356,183 8,100 2011 5,550,634 1,136,045 682,769 21,242 3,401,097 512,839 384,911 13,023 C.Homeimprovement 2000 1,833,277 91,575 65,286 1,548 843,884 10,896 37,047 760 2001 1,771,472 16,276 60,598 1,143 788,560 6,722 32,990 548 2002 1,459,049 11,582 58,080 636 676,515 4,878 30,533 197 2003 1,430,380 13,876 63,806 325 642,065 5,226 31,113 103 2004 2,081,528 11,887 109,105 224 904,492 5,557 56,341 94 2005 2,401,030 10,053 127,857 218 1,026,340 4,483 62,298 70 2006 2,335,338 12,645 132,694 150 1,067,730 6,115 65,842 44 2007 2,072,688 16,717 128,700 119 887,123 9,409 61,321 59 2008 1,294,162 26,544 83,036 266 516,612 12,347 39,170 158 2009 743,968 28,536 58,754 246 349,993 11,256 28,568 164 2010 583,892 34,449 51,415 391 303,344 11,810 26,190 57 2011 581,023 38,194 60,763 6,808 293,735 14,392 27,768 3,532 1 LoansinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmService Agency,ortheRuralHousingService. Nonconventionallendinghasalsogarneredalargershareof therefinancemarket.In2006, only2percentof refinanceloanswerenonconventional,comparedwith12percentin2011.
138 FederalReserveBulletin|December2012 Table5.Loansonmanufacturedhomes,byoccupancystatusofhomeandtypeofloan,2004–11 Number Owneroccupied Non-owneroccupied Year Conventional Nonconventional1 Conventional Nonconventional1 A.Homepurchase 2004 107,686 23,974 16,243 125 2005 101,539 27,229 17,927 56 2006 102,458 30,530 19,105 257 2007 95,584 28,554 13,963 92 2008 68,821 27,615 11,392 93 2009 43,543 20,630 7,920 29 2010 44,856 17,086 7,655 29 2011 40,312 14,663 7,482 218 B.Refinance 2004 79,838 6,922 6,507 57 2005 73,520 7,727 6,331 26 2006 64,969 11,750 6,240 68 2007 59,591 16,174 6,332 74 2008 44,342 21,926 6,817 177 2009 37,001 21,768 6,002 73 2010 26,340 9,751 5,024 69 2011 25,299 8,919 4,765 161 C.Homeimprovement 2004 17,119 128 1,269 5 2005 20,239 219 1,372 3 2006 20,886 490 1,425 2 2007 19,428 889 1,494 2 2008 12,621 681 1,324 36 2009 9,781 439 1,116 1 2010 8,012 427 999 2 2011 8,244 349 972 75 1 Seetable4,note1. Thissharedroppedsomefrom2010,asthenumberof nonconventionalrefinanceloansfell about21percent(table4).19 The Private Mortgage Insurance Market Intheconventionalloanmarket,lenderstypicallyrequirethataborrowerseekingtopurchaseanowner-occupiedpropertymakeadownpaymentof atleast20percentof ahome’s valueunlesstheborrowerobtainssometypeof third-partybacking,suchasmortgage insurance.Foraborrowerseekingaconventionalloanwithalowdownpayment,alender canrequirethattheborrowerpurchasemortgageinsurancefromaprivatemortgageinsurancecompanytoprotectthelenderagainstdefault-relatedlossesuptoacontractually establishedpercentageof theprincipalamount.Asaformof protectionforlendersagainst lossesfromdefaultingborrowers,PMIcompeteswithFHAinsuranceandVAloan guarantees. 19 Formore-detailedanalysisontheriseofgovernment-backedlendinginrecentyears,seeAveryandothers, “The2009HMDAData.”
TheMortgageMarketin2011 139 Table6.Privatemortgageinsuranceapplicationsandissuanceforone-tofour-familyproperties, byoccupancystatusofhomeandtypeofproperty,2000–11 Number Applications Issuance Owneroccupied Non-owneroccupied Owneroccupied Non-owneroccupied Year Manufactured Manufactured Manufactured Manufactured Site-built housing1 Site-built housing1 Site-built housing1 Site-built housing1 A.Homepurchase 2000 1,204,520 n.a. 95,549 n.a. 955,988 n.a. 75,473 n.a. 2001 1,266,440 n.a. 122,639 n.a. 1,002,385 n.a. 90,929 n.a. 2002 1,324,958 n.a. 153,277 n.a. 1,022,754 n.a. 115,573 n.a. 2003 1,315,221 n.a. 175,958 n.a. 1,021,476 n.a. 134,677 n.a. 2004 1,078,275 10,111 192,086 1,287 807,480 7,508 143,917 984 2005 886,749 10,470 174,174 1,480 676,758 7,512 130,945 1,171 2006 838,304 9,526 134,545 1,273 659,755 6,655 98,744 993 2007 1,260,666 7,928 148,057 1,113 1,015,240 5,531 109,772 774 2008 928,978 4,082 127,773 759 591,108 2,012 66,842 367 2009 341,311 535 14,372 92 206,878 125 5,208 29 2010 214,054 172 7,644 11 154,716 55 4,750 0 2011 245,677 219 11,547 8 193,215 89 8,272 0 B.Refinance2 2000 259,245 n.a. 14,771 n.a. 185,721 n.a. 10,859 n.a. 2001 856,112 n.a. 29,870 n.a. 663,465 n.a. 17,453 n.a. 2002 1,056,788 n.a. 40,771 n.a. 775,020 n.a. 23,035 n.a. 2003 1,372,551 n.a. 46,139 n.a. 1,014,558 n.a. 27,116 n.a. 2004 597,353 6,037 31,352 233 389,563 3,956 17,243 138 2005 438,019 3,702 23,217 136 309,821 2,384 13,239 88 2006 346,978 2,554 24,201 121 234,587 1,567 14,187 78 2007 507,137 2,108 36,508 104 362,961 1,313 22,533 58 2008 454,405 1,442 33,822 123 257,189 695 11,519 34 2009 275,541 429 3,611 15 153,633 126 1,121 4 2010 145,953 135 1,437 2 99,598 56 587 0 2011 149,480 196 1,664 0 109,866 72 838 0 1 Before2004,propertytypewasnotcollected;totalsforsite-builtandmanufacturedhousingareshowninthe“Site-built”column. 2 Includeshome-improvementloans.Privatemortgageinsurancecompaniesdonotdistinguishbetweenrefinanceloansand home-improvementloansinreporting.Loantotalsarethesummationofrefinanceandhome-improvementloans. n.a.Notavailable. Thesevencompaniesthatreporteddatafor2011dominatethePMIindustry.20Thus,the reporteddatacoverthevastmajorityof PMIwrittenintheUnitedStates.For2011,the sevenPMIcompaniesreportedonnearly409,000applicationsforinsuranceleadingtothe issuanceof 312,000insurancepolicies,upfromabout370,000applicationsand260,000 policiesin2010(dataderivedfromtable6).Reportedvolumesof PMIissuancein2011,as inrecentyears,havebeensubstantiallysmallerthanlevelspriorto2009.ThelargereductioninPMIissuancereflectsseveralfactors,includingtighterunderwritingadoptedbythe 20 In1993,theMortgageInsuranceCompaniesofAmerica,atradeassociation,askedtheFFIECtoprocessdata fromthelargestPMIcompaniesonapplicationsformortgageinsurance.Thesedatalargelymirrorthetypesof informationsubmittedbylenderscoveredbyHMDA.However,becausethePMIcompaniesdonotreceiveall oftheinformationaboutaprospectiveloanfromthelendersseekinginsurancecoverage,someitemsreported underHMDAarenotincludedinthePMIdata.Inparticular,loanpricinginformationandrequestsforpreapprovalareunavailableinthePMIdata.InthePMIdata,thereporteddispositionofanapplicationforinsurancereflectstheactionsofthePMIcompaniesor,inthecaseofawithdrawalofanapplication,theactionof thelender.
140 FederalReserveBulletin|December2012 PMIcompaniesinresponsetoelevatedclaimsandlossesexperiencedduringtherecent recessionandtheongoingrecovery.21 Overall,64percentof thePMIpoliciesissuedin2011coveredhome-purchaseloans,and theremaindercoveredrefinancemortgages(home-improvementloansareclassifiedasrefinanceloansbythePMIreporters).Virtuallyallof theapplicationsforPMIpoliciesissued involvedloanstopurchasesite-builtproperties,andalmostallof theapplicationsforPMI relatedtoowner-occupiedunits. ThedatareportedbythePMIindustryovertheyearshaveconsistentlyshownthatmost applicationsforinsuranceareapproved,aslendersareveryfamiliarwiththeunderwriting policiesof theinsurersandgenerallyarenotgoingtosubmitanapplicationthatisunlikely tobeapproved.Overall,about5percentof PMIinsuranceapplicationsweredeniedin 2011,downfromabout10percentin2010and12percentin2009butstillnotablyhigher thanin2006and2007,whenonlyabout2percentof therequestsforinsurancewereturned down(datanotshownintables).22AswiththeHMDAdata,PMIcompaniesreportthe reasonfordenial.Themostcommonlyreportedreasoncitedbylendersrelatedtoanissue withthecollateral,mostlikelypropertyvalue. Junior-Lien Lending Junior-lienloanscanbetakenouteitherinconjunctionwiththeprimarymortgage(apiggybackloan)orindependentlyof thefirst-lienloan.Asnoted,piggybackloanscanbeused byborrowerstoavoidhavingtopayforprivateorgovernmentmortgageinsurance.Similarly,piggybackloanscanalsobeusedtoreducethesizeof thefirst-lienloantobewithin thesizelimitsrequiredbyFreddieMacorFannieMaewithoutrequiringalargerdown paymentbytheborrower.Junior-lienloansthataretakenoutindependentlyof afirstlien canbeusedforanynumberof purposes,includingtofinancehome-improvementprojects or,inthecaseof open-endedhomeequitylinesof credit,toprovideareadilyavailable sourceof creditthatcanbedrawnonatthetimetheborrowerneedsthefunds.Underthe regulationsthatgovernHMDAreporting,mostof thesestandalonejunior-lienloansare notreported.23 In2006,closeto1.3millionjuniorliensusedforthepurchaseof owner-occupiedpropertieswerereportedunderHMDA(table7).Thisnumberfellbymorethanone-half in2007, droppedsharplyagainineachof theensuingyears,anddecreasedtolessthan42,000such loansin2010and2011.Morethan1millionjunior-lienloansweretakenouttorefinance loansbackedbyowner-occupiedpropertiesin2006,andthisnumberalsofellsubstantially startingin2007andcontinuedtofall,reachingalowpointof lessthan74,000in2011. TheHMDAdataalsoincludeinformationonjunior-lienloansusedforhome-improvementpurposes.In2011,nearly66,000junior-lienloanswereusedforsuchapurpose,down somefromabout80,000reportedin2010.Boththe2010and2011totalsaresharplybelow thehistorichighmarkof nearly570,000reachedin2006.Overall,junior-lienloansusedfor homeimprovementaccountedfor35percentof junior-lienloansreportedunderHMDA. 21 ForamoredetailedanalysisofthedeclineinPMIissuance,seeAveryandothers,“The2009HMDAData.” 22 Fortheotherapplicationsthatdidnotresultinapolicybeingwritten,eithertheapplicationwaswithdrawn, theapplicationfileclosedbecauseitwasnotcompleted,ortherequestwasapprovedbutnopolicywasissued. 23 Unlessajuniorlienisusedforhomepurchaseorexplicitlyforhomeimprovements,ortorefinanceanexisting lien,itisnotreportedunderHMDA.Further,homeequitylinesofcredit,manyofwhicharejuniorliens,do nothavetobereportedintheHMDAdataregardlessofthepurposeoftheloan.
TheMortgageMarketin2011 141 Table7.Homeloansforone-tofour-familyproperties,byoccupancystatusofhome,typeofloan,and lienstatus,2004–11 Number Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Firstlien Junior Unsecured2 Firstlien Junior Unsecured2 Firstlien Junior Unsecured2 Firstlien Junior Unsecured2 lien lien lien lien A.Homepurchase 2004 4,209,787 736,636 … 573,606 1,235 … 853,490 52,524 … 2,703 7 … 2005 4,520,3781,221,999 … 437,552 867 … 1,049,555 149,954 … 1,685 22 … 2006 4,013,1961,268,289 … 416,143 601 … 878,325 162,343 … 1,407 18 … 2007 3,031,606 551,343 … 422,450 1,056 … 605,714 50,202 … 888 8 … 2008 1,636,194 91,498 … 971,528 1,077 … 410,377 5,553 … 3,461 4 … 2009 1,132,424 42,224 … 1,322,489 1,477 … 288,526 2,034 … 3,756 9 … 2010 1,049,990 40,338 … 1,168,343 1,386 … 283,017 1,683 … 1,821 12 … 2011 1,036,112 40,334 … 1,024,696 1,131 … 311,831 1,307 … 1,438 5 … B.Refinance 2004 6,185,418 464,170 … 304,298 293 … 608,956 12,711 … 8,069 13 … 2005 5,607,642 728,362 … 158,198 276 … 578,491 25,423 … 3,236 21 … 2006 4,347,3481,035,602 … 121,761 373 … 546,430 38,712 … 989 27 … 2007 3,462,944 660,563 … 196,544 353 … 473,336 23,241 … 879 15 … 2008 2,374,781 219,012 … 521,863 380 … 328,844 9,070 … 3,814 10 … 2009 4,300,322 114,187 … 1,000,422 489 … 342,410 6,737 … 7,495 16 … 2010 3,860,760 87,986 … 655,334 240 … 350,458 5,725 … 8,092 8 … 2011 3,327,415 73,682 … 512,629 210 … 379,519 5,392 … 13,004 19 … C.Homeimprovement 2004 357,618 395,582 151,292 2,697 2,243 617 40,028 8,153 8,160 30 54 10 2005 409,947 468,375 148,018 2,197 1,873 413 42,544 10,756 8,998 17 49 4 2006 360,321 553,152 154,257 3,957 1,735 423 43,913 13,739 8,190 18 20 6 2007 301,078 435,187 150,858 7,510 1,579 320 41,670 11,508 8,143 35 18 6 2008 179,506 181,402 155,704 10,477 1,610 260 26,482 5,473 7,215 135 13 10 2009 166,865 84,414 98,714 8,197 2,541 518 19,961 3,193 5,414 99 28 37 2010 134,370 74,941 94,033 8,218 2,663 929 17,777 2,486 5,927 35 17 5 2011 129,851 60,423 103,461 7,116 2,949 4,327 18,491 2,257 7,020 64 45 3,423 1 Seetable4,note1. 2 Unsecuredloansarecollectedonlyforhome-improvementloansundertheHomeMortgageDisclosureAct. ...Notapplicable. Loan Sales ForeachloanoriginationreportedunderHMDAinagivenyear,lendersreportwhether thatloanwassoldduringthesameyear,andthetypeof institutiontowhichtheloanwas sold.24Broadly,thesepurchasertypescanbebrokenintothosethataregovernment related—GinnieMae,FannieMae,FreddieMac,andFarmerMac—andthosethatare not.GinnieMaeandFarmerMacfocusonloansbackeddirectlybygovernmentguaranteesorinsurance,whileFannieMaeandFreddieMacpurchaseconventionalloansthat 24 Althoughoneofthefewsourcesofinformationonloansales,theHMDAdatatendtounderstatetheimportanceofthesecondarymarket.HMDAreportersareinstructedtorecordloanssoldinacalendaryeardifferent fromtheyearoriginatedasbeingheldinportfolio,leadingthereportedloansalestounderstatetheproportion ofeachyear’soriginationsthatareeventuallysold.
142 FederalReserveBulletin|December2012 meetcertainloan-sizeandunderwritingstandards. Overall,about78percentof thefirst-lienhome-purchaseandrefinanceloansforone-to four-familypropertiesoriginatedin2011werereportedassoldduringtheyear(datanot shownintables).Theshareof originationsthataresoldvariessomefromyeartoyearand bytypeandpurposeof loan(table8).25Forexample,69percentof theconventionalloans extendedin2011forthepurchaseof owner-occupiedone-tofour-familydwellingswere soldthatyear.Incontrast,nearly94percentof thenonconventionalloansusedtopurchase owner-occupiedhomeswerereportedassoldin2011.Theshareof conventionalloans madetonon-owneroccupantsthatarereportedassoldisnotablysmallerthanthatof such loansmadetoowneroccupants.Also,thevastmajorityof conventionalloansextendedfor thepurchaseof manufacturedhomesareheldinportfolio;onlyabout10percentof such loansweresoldin2011. Borrower Incomes and Loan Amounts UnderHMDA,lendersreporttheloanamountappliedforandtheapplicantincomethat thelenderreliedoninmakingthecreditdecision,if incomewasconsideredintheunderwritingdecision.Lendersdonotnecessarilycollectandreportloanapplicants’entire income,becauseinsomecasesborrowershavemoreincomethanisneededtoqualifyfor theloan. Borrower Income Thevastmajorityof loanapplicationsandloansreportedunderHMDAincludeincome information.Forexample,in2011,incomeinformationwasnotreportedforlessthan 1percentof theborrowerspurchasingahomewithanonconventionalloanandfor3percentof thoseusingaconventionalloan(datanotshownintables).Incomeinformationis reportedlessoftenforrefinanceloans,particularlythosethatarenonconventional (aboutone-thirdof theFHAloansand63percentof theVAloans),mostlikelybecauseof streamlinedrefinanceprogramsthatdonotrequirecurrentincometobeconsideredin underwriting. Whiletheavailableinformationonamountsborrowedandapplicantincomecanbeevaluatedinmanyways,wefocushereonpatternsbyloanproductandpurpose.Forhome-purchaseorrefinancelending,borrowersusingFHAandVAloanshavelowermeanor medianincomesthanborrowersusingotherloans,despitethefactthattheFHA(andVA) loanlimitswereincreasedsubstantiallyin2008,potentiallyallowingtheprogramtobeused muchmorewidelythanbytheLMIhouseholdsthathavebeenthetraditionalfocusof the program(table9).Althoughtheshareof FHAhome-purchaseborrowerswithincomes above$100,000hasroughlydoubledsince2007(theyearbeforetheincreaseinloanlimits) toabout15percent,themedianincomeof borrowersgettingFHAhome-purchaseloans wasstillabout30percentlowerthanthatof thosegettingconventionalloans(dataderived fromtable9).Therelativelylowdown-paymentrequirementsonFHA-insuredloans—the averageloan-to-valueratioforFHAhome-purchaseloanswasover95percentin2011— maybecontinuingtoattractlower-incomeborrowers.26 25 SomeloansrecordedassoldintheHMDAdataaresoldtoaffiliatedinstitutionsandthusarenottruesecondary-marketsales.In2011,8.6percentoftheloansrecordedassoldintheHMDAdataweresalestoaffiliates. 26 SeeU.S.DepartmentofHousingandUrbanDevelopment(2012),QuarterlyReporttoCongressonFHA Single-FamilyMutualMortgageInsuranceFundPrograms,FY2011Q4(Washington:HUD,January31),http:// portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/rtc/fhartcqtrly.
TheMortgageMarketin2011 143 Table8.Distributionofhomeloansalesforone-tofour-familyproperties,byoccupancystatusofhome andtypeofloan,2000–11 Percent Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Memo:Share Memo:Share Memo:Share Memo:Share Sharesold soldtoGSEs2 Sharesold soldtoGSEs2 Sharesold soldtoGSEs2 Sharesold soldtoGSEs2 A.Homepurchase 2000 64.8 31.3 89.1 46.0 53.7 29.3 81.4 22.9 2001 66.8 34.6 86.1 46.2 57.9 34.0 92.2 23.0 2002 71.0 36.7 88.7 43.7 62.5 36.4 87.9 29.7 2003 72.3 33.1 91.2 40.7 63.1 31.8 80.8 21.6 2004 74.2 25.5 92.2 40.5 63.5 23.6 63.7 11.5 2005 75.9 18.7 89.9 32.6 69.7 18.0 49.7 16.3 2006 74.8 19.0 88.6 31.7 69.3 19.0 61.3 15.0 2007 70.1 29.1 87.6 32.5 61.4 26.9 74.9 27.6 2008 71.6 40.1 90.0 36.5 60.3 36.3 95.1 21.6 2009 70.1 40.1 91.4 35.0 56.4 34.7 88.9 35.2 2010 69.7 37.0 92.7 29.7 30.3 34.8 91.7 24.1 2011 68.9 34.2 93.5 33.4 61.9 34.5 80.3 35.2 B.Refinance 2000 47.4 18.0 84.5 50.0 47.3 21.7 86.3 42.8 2001 61.3 37.2 85.0 51.5 61.2 38.4 92.1 33.2 2002 66.8 40.4 85.7 45.0 65.9 43.2 81.3 45.4 2003 74.2 44.8 93.8 48.0 69.8 40.4 87.4 50.7 2004 69.0 27.6 93.2 44.2 62.2 22.6 88.0 35.9 2005 69.9 19.7 89.3 33.5 64.7 16.6 85.7 40.1 2006 65.7 15.2 86.8 31.8 64.9 15.7 79.0 29.6 2007 61.7 21.9 85.1 34.5 61.1 23.9 86.9 23.9 2008 65.3 38.0 88.8 35.4 56.8 33.0 95.7 20.4 2009 79.4 52.8 89.7 37.9 61.2 40.1 93.5 36.0 2010 76.8 46.1 90.2 37.8 65.4 40.3 90.5 43.8 2011 72.7 46.4 91.3 49.8 66.4 43.5 89.5 57.6 C.Homeimprovement 2000 6.3 1.1 15.6 4.7 4.4 .4 52.9 .5 2001 6.4 1.5 22.3 7.6 3.9 .8 73.7 1.1 2002 5.9 1.4 28.4 7.1 4.0 .9 55.3 3.6 2003 10.5 .8 43.8 6.7 6.5 .7 35.0 3.9 2004 23.6 6.0 48.7 23.5 23.1 7.5 20.2 7.4 2005 27.2 7.0 46.2 25.3 30.2 8.8 27.1 8.6 2006 22.0 5.3 60.4 31.8 29.4 8.9 29.5 15.9 2007 19.1 6.4 70.6 30.8 26.4 12.1 39.0 11.9 2008 14.7 8.7 80.0 49.2 20.0 14.5 74.7 6.3 2009 24.9 17.8 63.4 38.9 17.7 13.4 56.1 9.8 2010 21.2 13.2 60.6 34.7 18.3 12.6 47.4 28.1 2011 19.1 11.4 45.3 26.8 19.8 13.4 .3 .1 1 Seetable4,note1. 2 Loanssoldtogovernment-sponsoredenterprises(GSEs)includethosewithapurchasertypeofFannieMae,FreddieMac,GinnieMae,or FarmerMac.
144 FederalReserveBulletin|December2012 Table9.Cumulativedistributionofhomeloans,byborrowerincomeandbypurposeandtypeofloan, 2011 Percent Homepurchase Refinance Upperboundof borrowerincome Memo: Memo: (thousandsofdollars)1 FHA VA Conventional2 Total Higher FHA VA Conventional2 Total Higher priced3 priced3 24 5.3 1.1 3.2 3.7 9.5 3.5 2.3 2.4 2.4 10.2 49 41.5 23.2 25.4 31.0 48.3 28.2 19.5 16.6 17.4 41.5 74 69.4 56.7 47.0 55.9 72.2 58.1 48.0 36.8 38.4 67.2 99 84.9 77.0 62.6 71.9 83.9 77.8 69.3 54.9 56.6 81.8 124 92.5 88.4 73.9 81.9 89.8 88.6 83.1 68.9 70.4 89.4 149 96.1 94.0 81.3 87.8 92.9 93.9 90.5 78.2 79.4 93.2 199 98.7 98.2 89.6 93.7 95.9 98.0 96.6 88.4 89.2 96.4 249 99.4 99.4 93.7 96.3 97.2 99.2 98.7 93.1 93.6 97.7 299 99.7 99.7 95.8 97.5 98.0 99.6 99.4 95.4 95.8 98.3 Morethan299 100 100 100 100 100 100 100 100 100 100 Memo:Borrowerincome,byselectedloantype(thousandsofdollars)1 Mean 66.3 79.0 111.1 92.1 73.2 76.9 88.0 121.9 118.3 76.5 Median 56 69 79 68 51 67 76 92 90 56 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Forloanswithtwoor moreapplicants,lenderscoveredundertheHomeMortgageDisclosureAct(HMDA)reportdataononlytwo.Incomefortwoapplicantsis reportedjointly. 1 IncomeamountsarereportedunderHMDAtothenearest$1,000. 2 ConventionalloansplussomeloansoriginatedwithaFarmServiceAgencyorRuralHousingServiceguarantee. 3 Higher-pricedloansarethosewithannualpercentagerates1.5percentagepointsormoreabovetheaverageprimeofferrateforloansofa similartypepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil. FHAFederalHousingAdministration. VADepartmentofVeteransAffairs. Loan Amounts Unlikethedataonborrowerincomes,loanamountsareprovidedforallapplicationsand loansreportedintheHMDAdata.Loanamountsdifferacrossloantypes,withFHAor VAloans,onaverage,beingsmallerthanconventionalloans(whichmakeupmostof the “other”categoryintable10).However,anupwardshiftinthedistributionof loanamounts forbothFHAandVAhome-purchaseloanshasoccurredinthepastcoupleof years,continuinginto2011(dataforonly2011shownintables).Theshiftreflectsseveralfactors, includingthehigherloanlimitsallowedundertheseprograms. Application Disposition, Loan Pricing, and Status under the Home Ownership and Equity Protection Act Intables11and12,wecategorizeeveryloanapplicationandrequestforpreapproval reportedin2011into25distinctproductcategoriescharacterizedbytypeof loanandproperty,purposeof loan,andlienandowner-occupancystatus.Eachproductcategorycontainsinformationonthenumberof totalandpreapprovalapplications,applicationdenials, originatedloans,loanswithpricesabovethereportingthresholdsestablishedbyHMDA reportingrulesforidentifyinghigher-pricedloans,loanscoveredbytheHomeOwnership andEquityProtectionActof 1994(HOEPA),andthemeanandmedianannualpercentage rate(APR)spreadsforloansreportedashigherpriced.
TheMortgageMarketin2011 145 Table10.Cumulativedistributionofhomeloans,byloanamountandbypurposeandtypeofloan,2011 Percent Homepurchase Refinance Upperboundof loanamount (thousandsof Memo: Memo: dollars)1 FHA VA Conventional2 Total Higher FHA VA Conventional2 Total Higher priced3 priced3 24 .1 .0 .5 .3 2.8 .1 .0 .5 .5 4.3 49 2.0 .4 3.2 2.5 13.9 1.6 .7 3.3 3.0 16.8 74 9.6 2.6 9.7 9.0 29.8 7.4 3.9 10.3 9.8 32.8 99 22.1 7.8 18.3 18.7 44.9 17.3 10.5 20.2 19.5 47.5 149 50.9 28.3 38.9 42.2 68.8 44.5 32.9 41.2 41.1 68.4 199 71.7 53.6 55.1 60.9 82.0 66.5 55.8 58.1 58.7 80.3 274 88.5 77.5 71.9 78.4 91.2 85.3 77.6 74.7 75.8 89.4 417 97.4 94.5 88.8 92.4 96.9 96.0 94.6 92.0 92.5 96.9 625 99.6 99.1 96.0 97.6 98.8 99.3 99.0 97.0 97.3 99.0 729 99.9 99.7 97.4 98.5 99.2 99.9 99.6 98.1 98.3 99.3 Morethan799 100 100 100 100 100 100 100 100 100 100 Memo:Loanamount(thousandsofdollars) Mean 170.2 217.2 234.7 210.1 141.6 185.3 212.9 220.3 217.0 141.6 Median1 147 191 180 167 109 160 185 173 172 104 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.” 1 LoanamountsarereportedundertheHomeMortgageDisclosureActtothenearest$1,000. 2 Seetable9,note2. 3 Seetable9,note3. FHAFederalHousingAdministration. VADepartmentofVeteransAffairs. Disposition of Applications Asnoted,the2011HMDAdataincludeinformationon11.7millionloanapplications, nearly86percentof whichwereactedonbythelender(dataderivedfromtable11).With respecttothedispositionof applications,patternsof denialratesarelargelyconsistentwith whathadbeenobservedinearlieryears.27Denialratesonapplicationsforhome-purchase loansarenotablylowerthanthoseobservedonapplicationsforrefinanceorhome-improvementloans.Denialratesonapplicationsbackedbymanufacturedhousingaremuch higherthanthoseonapplicationsbackedbysite-builthomes.Forexample,thedenialrate forfirst-lienconventionalhome-purchaseloanapplicationsforowner-occupiedsite-built propertieswas14.8percentin2011,comparedwithadenialrateof 52.7percentforsuch applicationsforowner-occupiedmanufacturedhomes. Undertheprovisionsof HMDA,reportinginstitutionsmaychoosetoreportthereasons theyprovideconsumerswhoseapplicationsareturneddown.Reportinginstitutionsmay 27 TheinformationprovidedinthetablesisidenticaltothatprovidedinanalysesofearlieryearsofHMDAdata. Comparisonsofthenumbersinthetableswiththoseintablesfromearlieryears,includingstatisticsondenial rates,canbemadebyconsultingthefollowingarticles:Averyandothers,“TheMortgageMarketin2010”; Averyandothers,“The2009HMDAData”;andRobertB.Avery,NeilBhutta,KennethP.Brevoort,GlennB. Canner,andChristaN.Gibbs(2010),“The2008HMDAData:TheMortgageMarketduringaTurbulent Year,”FederalReserveBulletin,vol.96(April),pp.A169–A211.AlsoseeRobertB.Avery,KennethP.Brevoort, andGlennB.Canner(2008),“The2007HMDAData,”FederalReserveBulletin,vol.94(December), pp.A107–A146;RobertB.Avery,KennethP.Brevoort,andGlennB.Canner(2007),“The2006HMDAData,” FederalReserveBulletin,vol.93(December),pp.A73–A109;RobertB.Avery,KennethP.Brevoort,andGlenn B.Canner(2006),“Higher-PricedHomeLendingandthe2005HMDAData,”FederalReserveBulletin,vol.92 (September),pp.A123–A166;andRobertB.Avery,GlennB.Canner,andRobertE.Cook(2005),“NewInformationReportedunderHMDAandItsApplicationinFairLendingEnforcement,”FederalReserveBulletin, vol.91(Summer),pp.344–94.
146 FederalReserveBulletin|December2012 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2011 Applications Typeofhomeandloan Acteduponbylender Numbersubmitted Number Numberdenied Percentdenied 1–4FAMILY Nonbusinessrelated3 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien 1,438,327 1,260,646 186,025 14.8 Juniorlien 57,851 50,569 7,915 15.7 Governmentbacked Firstlien 1,450,709 1,274,493 203,893 16.0 Juniorlien 1,930 1,407 233 16.6 Refinance Conventional Firstlien 5,367,738 4,595,645 1,021,597 22.2 Juniorlien 122,890 113,873 36,232 31.8 Governmentbacked Firstlien 1,115,624 829,981 264,225 31.8 Juniorlien 354 262 57 21.8 Homeimprovement Conventional Firstlien 211,771 187,603 51,680 27.5 Juniorlien 131,977 123,254 57,825 46.9 Governmentbacked Firstlien 15,879 11,175 3,407 30.5 Juniorlien 8,455 6,705 3,476 51.8 Unsecured(conventionalorgovernmentbacked) 230,011 224,145 113,447 50.6 Manufactured Conventional,firstlien Homepurchase 196,525 189,483 99,788 52.7 Refinance 51,727 46,960 18,555 39.5 Other 70,033 62,119 22,064 35.5 Non-owneroccupied4 Conventional,firstlien Homepurchase 417,027 368,926 58,290 15.8 Refinance 648,094 548,887 161,447 29.4 Other 98,538 88,891 36,593 41.2 citeuptothreereasonsforeachdeniedapplication,althoughmostof thosethatprovide thisinformationciteonlyonereason.Ananalysisof thereasonsfordenialprovidedtoprospectiveborrowerswhoseapplicationsforconventionalcreditforthepurchaseof owneroccupiedhomeswereturneddownfindsthatcollateral-relatedissuesanddebt-to-income considerationswerethetwocategoriesof reasonsthathaveseenthelargestincrease since2006(datanotshownintables).Debt-to-incomeissueswerealsocitedsomewhat moreoftenforapplicationsforFHAorVAhome-purchaseloans,butcollateralwasthe categorythathadthelargestpercentageincrease.Theserelationshipsarenotsurprising, giventhechangesinunderwritingpracticesandthewidespreaddeclineinhomevalues since2006.
TheMortgageMarketin2011 147 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2011—continued Loansoriginated LoanswithAPORspreadabovethethreshold1 Typeofhome andloan Distribution,bypercentagepointsofAPORspread APORspread Number Number (percentagepoints) of Number Percent HOEPA- 5 covered 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 ormore Mean Median loans2 1–4FAMILY Nonbusinessrelated3 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien 995,061 38,660 3.9 41.6 22.0 13.3 14.6 5.8 2.9 2.5 2.1 … Juniorlien 39,943 5,465 13.7 … … … 38.6 48.1 13.3 4.5 4.2 … Governmentbacked Firstlien 1,009,654 28,592 2.8 71.3 21.5 3.2 1.1 2.1 .9 2.0 1.8 … Juniorlien 1,115 4 .4 … … … 25.0 50.0 25.0 5.2 4.8 … Refinance Conventional Firstlien 3,299,037 51,664 1.6 46.8 16.6 11.0 13.6 6.0 6.1 2.6 2.1 735 Juniorlien 71,341 9,550 13.4 … … … 30.0 38.9 31.2 4.8 4.5 201 Governmentbacked Firstlien 503,259 29,744 5.9 31.7 26.0 20.5 19.6 1.7 .4 2.5 2.3 46 Juniorlien 190 6 3.2 … … … … 66.7 33.3 4.9 4.8 0 Homeimprovement Conventional Firstlien 126,491 10,663 8.4 29.0 16.8 13.8 17.8 7.9 14.8 3.2 2.6 366 Juniorlien 59,607 6,781 11.4 … … … 30.8 33.5 35.7 4.9 4.5 187 Governmentbacked Firstlien 6,846 1,723 25.2 18.8 23.0 26.2 25.5 2.8 3.7 2.8 2.6 10 Juniorlien 2,914 2,472 84.8 … … … 3.0 5.9 91.1 7.0 7.1 0 Unsecured (conventional orgovernment backed) 102,899 … … … … … … … … … … … Manufactured Conventional,firstlien Homepurchase 39,960 32,623 81.6 4.5 3.4 5.3 13.8 16.2 56.7 5.7 5.4 … Refinance 24,477 7,933 32.4 17.1 9.7 10.8 21.9 16.5 24.0 3.9 3.6 577 Other 33,238 5,777 17.4 32.9 15.6 9.9 14.0 10.6 17.0 4.1 2.6 214 Non-owneroccupied4 Conventional,firstlien Homepurchase 285,333 13,696 4.8 46.4 16.6 11.2 13.6 5.6 6.6 2.6 2.1 … Refinance 355,243 13,207 3.7 59.1 14.9 8.6 10.3 4.5 2.7 2.3 1.8 32 Other 48,084 2,760 5.7 24.6 12.7 7.5 19.8 17.5 17.9 3.5 3.4 13 1 Averageprimeofferrate(APOR)spreadisthedifferencebetweentheannualpercentagerateontheloanandtheAPORforloansofasimilar typepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Thethresholdforfirst-lienloansisaspreadof 1.5percentagepoints;forjunior-lienloans,itisaspreadof3.5percentagepoints. 2 LoanscoveredbytheHomeOwnershipandEquityProtectionActof1994(HOEPA),whichdoesnotapplytohome-purchaseloans. 3 Business-relatedapplicationsandloansarethoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantor co-applicantare“notapplicable”;allotherapplicationsandloansarenonbusinessrelated. 4 Includesapplicationsandloansforwhichoccupancystatuswasmissing. …Notapplicable.
148 FederalReserveBulletin|December2012 Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2011—continued Applications Typeofhomeandloan Acteduponbylender Numbersubmitted Number Numberdenied Percentdenied Businessrelated3 Conventional,firstlien Homepurchase 30,458 29,464 1,066 3.6 Refinance 31,687 30,609 1,813 5.9 Other 10,157 8,904 983 11.0 MULTIFAMILY5 Conventional,firstlien Homepurchase 10,146 9,367 1,106 11.8 Refinance 19,588 18,303 2,410 13.2 Other 5,314 4,904 719 14.7 Total 11,742,810 10,086,575 2,354,846 23.3 5 Includesbusiness-relatedandnonbusiness-relatedapplicationsandloansforowner-occupiedandnon-owner-occupiedproperties. InadditiontotheapplicationdataprovidedunderHMDA,nearly430,000requestsfor preapprovalwerereportedasactedonbythelenderin2011,downabout3percentfrom 2010(table12).Themajorityof requestsforpreapprovalsinvolvedconventionalloans. About30percentof theserequestsforpreapprovalweredeniedbythelenderin2011,a proportionthatishigherthanin2010.Notunexpectedly,thenumberof requestsforpreapprovalisdownsubstantiallyfromthelevelsrecordedattheheightof thehousingboom, whenmarketconditionsfavoredhomesellersandpreapprovalletterswereafactorthat enhancedthepositionof prospectivehomebuyers.In2006,coveredinstitutionsreported thattheyreceivednearly1.2millionrequestsforpreapprovalonwhichtheytookaction (datanotshownintables). Table11.Dispositionofapplicationsforhomeloans,andoriginationandpricingofloans,bytypeof homeandtypeofloan,2011—continued Loansoriginated LoanswithAPORspreadabovethethreshold1 Typeofhome andloan Distribution,bypercentagepointsofAPORspread APORspread Number Number (percentagepoints) of Number Percent HOEPA- 5 covered 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 ormore Mean Median loans2 Businessrelated3 Conventional,firstlien Homepurchase 27,589 564 2.0 24.8 24.5 22.9 24.3 2.7 .9 2.6 2.5 … Refinance 28,177 549 1.9 25.7 21.0 26.6 18.9 6.4 1.5 2.6 2.5 2 Other 7,693 119 1.5 17.7 15.1 13.5 23.5 20.2 10.1 3.3 3.3 … MULTIFAMILY5 Conventional,firstlien Homepurchase 7,848 166 2.1 27.7 28.3 19.3 18.1 3.0 3.6 2.6 2.4 … Refinance 15,238 229 1.5 27.5 26.2 18.3 15.7 6.6 5.7 2.7 2.4 1 Other 4,025 42 1.0 11.9 28.6 14.3 19.1 7.1 19.1 3.5 2.9 3 Total 7,095,262 262,989 3.7 35.5 15.6 9.9 15.0 9.6 14.4 3.2 2.5 2,387
TheMortgageMarketin2011 149 Table12.Home-purchaselendingthatbeganwitharequestforpreapproval:Dispositionandpricing, bytypeofhome,2011 Applicationspreceded Loanoriginationswhoseapplicationswereprecededbyrequests Requestsforpreapproval byrequests forpreapproval1 forpreapproval Actedupon LoanswithAPORspreadabovethethreshold2 bylender Type ofhome Number Per- Number APORspread acted Number Distribution,bypercentagepoints cent sub- Number (percentage upon denied ofAPORspread bylender denied mitted Number Number Num- Per- points) denied ber cent 1.5– 2– 2.5– 3– 4– 5or Mean Median 1.99 2.492.99 3.99 4.99 more spread spread 1–4FAMILY Nonbusinessrelated3 Owneroccupied Sitebuilt Conventional Firstlien 217,757 57,848 27 123,940 19,888 16,177 81,794 1,771 2.2 44.5 19.610.1 11.2 9.9 4.7 2.6 2.1 Juniorlien 7,396 945 13 5,820 354 147 5,184 1,058 20.4 … … … 29.1 61.8 9.1 4.3 4.3 Government backed Firstlien 160,904 62,602 39 86,517 11,279 10,616 61,790 2,568 4.2 71.0 16.4 5.5 1.8 2.3 3.0 2.1 1.8 Juniorlien 146 17 12 126 32 11 83 2 2.4 … … … … 100 … 4.8 4.8 Manufactured Conventional, firstlien 3,392 1,008 30 2,282 322 469 1,252 729 58.2 5.2 2.6 5.6 8.4 10.3 67.9 6.9 6.5 Other 2,625 1,092 42 1,474 227 172 1,047 36 3.4 83.3 11.1 5.6 … … … 1.8 1.8 Non-owneroccupied4 Conventional, firstlien 35,912 7,019 20 22,454 3,355 2,372 15,514 502 3.2 50.6 18.5 9.6 11.4 6.4 3.6 2.4 2.0 Other 725 322 44 361 91 135 115 11 9.6 36.4 36.4 9.1 9.1 … 9.1 2.6 2.1 Businessrelated3 Conventional, firstlien 499 27 5 457 39 35 361 14 3.9 21.4 21.421.4 35.7 … … 2.6 2.7 Other 90 12 13 77 10 22 42 1 2.4100 … … … … … 1.5 1.5 MULTIFAMILY5 Conventional, firstlien 70 2 3 65 6 10 48 5 10.4 … 40.020.0 40.0 … … 2.9 2.6 Other 3 0 0 3 1 0 2 1 50.0 … … … … 100 … 4.1 4.1 Total 429,519 130,894 30 243,576 35,604 30,166 167,232 6,698 4.0 43.9 13.3 6.2 10.1 14.9 11.5 3.1 2.2 1 Theseapplicationsareincludedinthetotalreportedintable11. 2 Seetable11,note1. 3 Seetable11,note3. 4 Seetable11,note4. 5 Seetable11,note5. …Notapplicable. The Incidence of Higher-Priced Lending Price-reportingrulesunderHMDAsincelate2009definehigher-pricedfirst-lienloansas thosewithanAPRof atleast1.5percentagepointsabovetheaverageprimeofferrate
150 FederalReserveBulletin|December2012 (APOR)forloansof asimilartype(forexample,a30-yearfixed-ratemortgage).28The spreadforjunior-lienloansmustbeatleast3.5percentagepointstobeconsideredhigher priced.TheAPOR,whichispublishedweeklybytheFFIEC,isanestimateof theAPRon loansbeingofferedtohigh-qualityprimeborrowersbasedonthecontractinterestrates anddiscountpointsreportedbyFreddieMacinitsPrimaryMortgageMarketSurvey (PMMS).29 Thedatashowthattheincidenceof higher-pricedlendingacrossallproductsin2011was about3.7percent,upabout50basispoints,or0.5percentagepoint,from2010(table11).30 Theincidencevariesacrossloantypes,products,andpurposes.First,inalmostallcases, nonconventionalloanshavealowerincidenceof higher-pricedlendingthandocomparable conventionalloanproducts,althoughthedifferencesinincidencearemuchsmallerthanin theperiodwhenmanyconventionalloansweresubprimeornearprime.In2011,among first-lienhome-purchaseloansforsite-builthomes,3.9percentof conventionalloanshad APRsabovetheprice-reportingthreshold,versus2.8percentof nonconventionalloans. (Amongnonconventionalloans,thosebackedbyVAguaranteeshaveaparticularlylow incidenceof beinghigherpriced:In2011,lessthan0.04percentof theVA-guaranteedfirstlienhome-purchaseloanswerehigherpriced.) Second,withfewexceptions,first-lienloanshavealowerincidenceof higher-pricedlending thandojunior-lienloansforthesamepurposes.Forexample,in2011,theincidenceof higher-pricedlendingforconventionalfirst-lienrefinanceloanswas1.6percent,whereas forcomparablejunior-lienloansitwas13.4percent.Thisrelationshipisfounddespitethe factthatthethresholdforreportingajunior-lienloanashigherpricedis2percentage pointshigherthanitisforsoreportingafirst-lienloan.Third,manufactured-homeloans exhibitthegreatestincidenceof higher-pricedlendingacrossallloancategories.For2011, nearly82percentof theconventionalfirst-lienloansusedtopurchasemanufacturedhomes werehigherpriced. TheHMDAdataalsoshowthattheincidenceof higher-pricedlendingisrelatedtoborrowerincomesandtheamountsborrowed,withborrowerswithlowerincomesandthose receivingsmallerloansmorelikelytoobtainahigher-pricedloan.Forexample,56percent of home-purchaseloanswereextendedtoborrowerswithincomesunder$75,000,while suchborrowersaccountfor72percentof allhigher-pricedhome-purchaseloans(table9). Acrossloanamounts,19percentof home-purchaseloanswereunder$100,000,whereas 45percentof higher-pricedhome-purchaseloanswereunder$100,000(table10). Rate Spreads for Higher-Priced Loans In2011,themeanAPORspreadreportedforhigher-pricedfirst-lienconventionalloansfor thepurchaseof anowner-occupiedsite-builthomewasabout2.5percentagepoints,comparedwithabout2.0percentagepointsforhigher-pricedfirst-liennonconventionalloans 28 Formoreabouttherulechangesrelatedtohigher-pricedlending,seeAveryandothers,“The2009HMDA Data.” 29 SeeFreddieMac,“WeeklyPrimaryMortgageMarketSurvey(PMMS),”webpage,www.freddiemac.com/ pmms;andFederalFinancialInstitutionsExaminationCouncil,“NewFFIECRateSpreadCalculator,”webpage,www.ffiec.gov/ratespread/newcalc.aspx. 30 Inpreviousarticlesexploringthedistortionscreatedbytheoldloanpricingclassificationmethodology(see Averyandothers,“The2009HMDAData”),weusedanadjustmenttechniquethattriedtoaddressthosedistortions.Theadjustmenttechniquewassimilartothenewreportingrules,thoughitwasalsoclearlyinferiorto themandcouldnothavebeenimplementedwithoutaccesstodateinformation,whichisnotpartofthepublic usefile.Withoutthisadjustment,comparisonofhigher-priceddataforloanscoveredbytheoldreportingrules withsuchdataforloanscoveredbythenewonesisnotappropriate.Evenwiththeadjustment,itisnotpossible toadjustthedataforloansreportedundertheoldrulestomakethemfullycomparabletodatareportedunder thenewrules.Forthisreason,werestrictourdiscussionheretothe2010and2011data.
TheMortgageMarketin2011 151 usedforthesamepurpose(table11).Averagespreadsforfirst-lienconventionalandgovernment-backedrefinanceloanswere2.5percentagepointsand2.6percentagepoints, respectively. Itisworthnotingthatthevastmajorityof nonconventionalloansreportedashigherpriced in2011exceededtheHMDAprice-reportingthresholdsbyonlyasmallamount:Specifically,71percentof thehigher-pricednonconventionalfirst-lienhome-purchaseloanshad reportedspreadswithin50basispointsof thethreshold.Bycomparison,onlyabout 42percentof thecomparableconventionalloansreportedashigherpricedhadpricesthis closetothemarginof reporting.Incontrast,theshareof higher-pricednonconventional refinancingloanswithAPORsclosetothemarginof reporting(32percent)isalittleless thantheshareof higher-pricedconventionalrefinancingloanswithsuchAPORs(about 47percent). Asexpected,consistentwiththehigherreportingthresholdof junior-lienlending,higherpricedjunior-lienloanproductshavehighermeanandmedianAPORspreadsthando higher-pricedfirst-lienloans.Higher-pricedloansformanufacturedhomesdifferfrom otherloanproductsinthattheygenerallyhavethehighestmeanspreads.In2011,thetypicalhigher-pricedconventionalfirst-lienloantopurchaseamanufacturedhomehada reportedspreadof about5.7percentagepoints,comparedwithanaveragespreadof roughly2.5percentagepointsforcomparablehigher-pricedloansforsite-builtproperties. HOEPA Loans TheHMDAdataindicatewhichloansarecoveredbytheprotectionsaffordedbyHOEPA. UnderHOEPA,certaintypesof mortgageloansthathaveinterestratesorfeesabovespecifiedlevelsrequireadditionaldisclosurestoconsumersandaresubjecttovariousrestrictionsonloanterms.31For2011,574lendersreportedextending2,387loanscoveredby HOEPA(table11;dataregardinglendersnotshownintables).Incomparison,655lenders reportedonabout3,400loanscoveredbyHOEPAin2010.Intheaggregate,HOEPArelatedlendingmadeuplessthan0.05percentof alltheoriginationsof home-securedrefinancingsandhome-improvementloansreportedfor2011(dataderivedfromtables).32 Lender Concentration in the Mortgage Market Recentpressaccountshavehighlightedtheoutsizedroleof afewlargerlendingorganizationsinthemortgagemarket.33Table13liststhetop10mortgageoriginatingorganizations (inclusiveof theirreportingmortgagelendingaffiliatesandsubsidiaries)accordingtothe HMDAdata.WellsFargotopsthelist,havingoriginatedover900,000loansin2011,which translatesintoamarketshareof about13percent.34JPMorganChaseandBankof Americaeachhadamarketshareof over5percent,followedbyU.S.BankandQuicken Loanswithover2percent.WellsFargo,JPMorganChase,andBankof Americahadconsiderablylargermarketsharesin2011thanin2006,inpartbecauseof theiracquisitionsof Wachovia,WashingtonMutual,andCountrywide,respectively.Theremainderof thetop 31 Unlikethethresholdrulesusedtoreporthigher-pricedloans,thethresholdrulesusedtoidentifyHOEPAloans didnotchangebetween2009and2010,andthusthe2011numberofHOEPAloansiscomparabletothoseof earlieryears. 32 HOEPAdoesnotapplytohome-purchaseloans. 33 Forexample,seeDakinCampbellandHughSon(2012),“WellsFargoDominatesHomeLendingasBofA Retreats:Mortgages,”Bloomberg,May3,www.bloomberg.com/news/2012-05-03/wells-fargo-dominates-homelending-as-bofa-retreats-mortgages.html. 34 Weincludeallfirst-lienoriginationsrecordedintheHMDAdata,regardlessofpurpose,loantype,orproperty type.
152 FederalReserveBulletin|December2012 Table13.Homeloanoriginationsandpurchasesbytop10originators,2011and2006 Percentexceptasnoted Loansoriginated1 Loanspurchased2 Conventionalonly Conventionalonly Organization Number M sh a a rk re et pu H r o c m ha e se n R a e n f c i- e pu H ( r a o c s m ha a e se Re ( f a in s a a nce Heldin p H o e rt ld fo i l n io Number Co ti n o v n e a n l - Heldin p H o e rt ld fo i l n io shareof share portfolio3 orsoldto portfolio3 orsoldto allhome ofall affiliate3 affiliate3 refinance) purchase) 2011 1.WellsFargo&Co. 908,962 13.4 31.2 67.1 53.8 87.2 7.4 7.8 845,871 47.4 5.3 5.3 2.JPMorganChase &Co. 470,760 6.9 8.1 91.6 57.0 97.2 3.5 42.6 300,092 46.0 4.1 40.2 3.BankofAmerica Corp. 343,471 5.1 28.7 69.9 57.6 88.6 13.7 13.9 442,416 36.4 23.5 23.5 4.U.S.Bancorp 164,937 2.4 24.6 72.4 65.6 92.3 37.9 37.9 114,128 61.0 1.5 1.5 5.Quicken Loans,Inc. 143,870 2.1 8.4 91.6 42.6 64.2 .2 .2 0 n.a. n.a. n.a. 6.Citigroup 113,468 1.7 13.0 84.3 93.6 96.1 46.2 61.9 252,128 91.2 13.3 53.0 7.FifthThird Bancorp 101,956 1.5 26.8 72.4 54.5 92.2 29.6 40.0 15,014 68.7 5.5 5.5 8.Flagstar Bank,FSB 92,875 1.4 39.2 58.8 49.8 82.0 .7 .7 32,249 43.2 6.4 6.4 9.AllyFinancial 83,123 1.2 16.6 80.7 83.1 94.0 2.1 99.4 431,925 81.6 .5 38.3 10.SunTrustBank 80,375 1.2 36.1 63.9 69.1 92.8 5.9 12.5 31,433 74.1 55.7 55.7 Total 2,503,797 36.9 23.7 74.9 57.4 89.3 11.7 25.5 2,465,256 56.8 8.3 27.4 Memo:Allother organizations 4,284,175 63.1 41.7 55.4 56.7 86.3 34.9 36.8 479,406 61.4 21.2 21.6 2006 1.Countrywide 872,732 8.1 50.4 45.9 92.1 98.6 3.5 13.5 1,409,623 95.6 8.0 29.5 2.WellsFargo&Co. 697,593 6.5 58.8 37.0 89.7 96.2 24.4 24.8 411,346 72.4 17.0 17.0 3.BankofAmerica Corp. 356,300 3.3 57.5 34.9 97.7 99.1 41.6 41.8 193,761 99.9 58.6 58.6 4.WachoviaCorp. 341,218 3.2 29.7 64.4 95.6 99.5 48.4 64.0 61,525 99.8 55.0 83.3 5.JPMorganChase &Co. 317,755 3.0 44.6 52.1 91.1 98.0 6.0 100.0 204,632 89.0 37.8 99.4 6.NationalCity Corp. 278,426 2.6 60.9 36.5 92.1 94.2 4.2 52.1 6,206 95.8 .0 95.2 7.Washington MutualBank,FSB 270,278 2.5 29.8 66.0 98.7 98.9 40.7 42.8 415,199 96.7 12.1 12.7 8.GMACBank 248,050 2.3 41.6 58.3 92.1 97.7 2.3 73.6 862,978 96.7 10.0 20.2 9.Citigroup 215,454 2.0 30.2 62.3 97.0 98.5 48.0 60.6 616,319 91.4 54.1 70.8 10.HSBC Holdings,PLC 194,308 1.8 27.7 58.0 95.5 99.4 40.7 48.8 306,585 100.0 64.4 66.8 Total 3,792,114 35.2 46.7 48.5 92.9 98.1 22.6 43.5 4,488,174 93.4 24.8 38.8 Memo:Allother organizations 6,979,080 64.8 50.9 45.8 91.8 97.2 26.7 31.5 1,748,178 94.4 38.4 54.9 1 First-lienmortgagesforowner-occupiedone-tofour-familyhomes. 2 Allliensareincludedbecauselienstatusisnotalwaysavailable. 3 “Heldinportfolio”referstoloansheldbeyondtheyearoforiginationorpurchase;excludesloansoriginatedorpurchasedduringthelast quarteroftheyear. n.a.Notavailable. 10organizationshadmarketsharesunder2percent,andthetop10collectivelyissued about37percentof allmortgageoriginationsreportedintheHMDAdatain2011,roughly thesameasin2006. Notably,marketsharesderivedfromtheHMDAdatadiffermarkedlyfrommarketshares recentlyreportedinthepressbasedoninformationcompiledbyInsideMortgageFinance.
TheMortgageMarketin2011 153 ItisimportanttonotethatforHMDAreportingpurposes,institutionsreportonlymortgageapplicationsinwhichtheymakethecreditdecision.UnderHMDA,if anapplication isapprovedbyathirdparty(suchasacorrespondent)ratherthanthelendinginstitution, thenthatpartyreportstheloanasitsownoriginationandthelendinginstitutionreports theloanasapurchasedloan.Alternatively,if athirdpartyforwardsanapplicationtothe lendinginstitutionforapproval,thenthelendinginstitutionreportstheapplicationunder HMDA(andthethirdpartydoesnotreportanything).Incontrast,InsideMortgage Financeconsidersloanstohavebeenoriginatedbytheacquiringinstitutionevenif athird partymakesthecreditdecision.Thus,manyof thelargerlendingorganizationsthatwork withsizablenetworksof correspondentsreportconsiderablevolumesof purchasedloansin theHMDAdata,whileInsideMortgageFinanceconsidersmanyof thesepurchasedloans tobeoriginations. Tobesure,bothmarketsharenumbersareimportantforunderstandingthesupplysideof themortgagemarket.TheHMDAdata,byfocusingontheentitythatmakestheapproval decision,highlightthatthemortgagemarketcontinuestobehighlydecentralizedalongcertaindimensions,withalargenumberof relativelysmallentitiesoperatingattheretaillevel, workingwithmortgageapplicants,evaluatingtheirapplications,andmakinglendingdecisions.Thatsaid,overallcreditavailabilityandpricingdependonamultitudeof additional factors,suchasgovernment-sponsoredenterpriseandFHApractices,lenders’willingness andabilitytotakerisk,competitionbetweenwholesalelenders,andgeneralcreditconditionsandinvestorappetiteforrisk. Table13showsthatamongthetop10organizations,manyof themreportedalargenumberof purchasedloansin2011,particularlyWellsFargo,Bankof America,andAlly Financial.Asdiscussedearlier,manyof thesepurchasesarelikelytobefromcorrespondents,thoughitisnotpossiblefromtheHMDAdatatodeterminehowmany.Itisalso worthnotingthatorganizationsoftenturnaroundandresellloansthattheypurchased(see lasttwocolumnsof table13). Finally,theHMDAdataindicatethatthebusinessstrategiesamongthetop10organizationsappeartovaryconsiderably.Forexample,around30percentof WellsFargo’sand Bankof America’soriginationswereforhome-purchaseloans,comparedwithlessthan 10percentforJPMorganChaseandQuickenLoans.CitigroupandAllyFinancialconcentratedrelativelymoreheavilyonrefinanceloansthanonhome-purchaseloans.Theseinstitutionsalsodifferconsiderablyintermsof thefractionof loansheldinportfoliobeyond theyearof origination.35Forexample,U.S.BancorpandCitigroupeachheldinportfolio 40percentormoreof theconventionalloanstheyoriginated,comparedwithlessthan 10percentforWellsFargoandJPMorganChase.TheHMDAdataalsorevealconsiderable variationacrosstheselargerlendersinthetypesof loans(conventionalcomparedwith FHA,VA,orFSA)theytendtoextend.Forexample,abouthalf of thehome-purchase loansreportedbyWellsFargowereconventional,whereasabout90percentof thoseoriginatedbyCitigroupwereof thistype. The Credit Scores of Home-Purchase Mortgage Borrowers Additionalinformationaboutindividualsobtainingmortgagestopurchasehomescanbe gainedbyareviewof creditrecorddatacollectedbycredit-reportingagencies.Thesedata canbeusedtoidentifyindividualstakingoutmortgagestofinanceahomepurchaseand, 35 Forthisanalysis,weconsideronlythoseloansoriginatedinthefirstthreequartersoftheyear;loansoriginated inthelastquarteroftheyeararelesslikelytobereportedassoldsimplybecausethereisnotmuchtimetosell theloan.
154 FederalReserveBulletin|December2012 amongthese,individualswhoarefirst-timehomebuyers.Becausethecreditrecorddata usedhereincludethecreditscoresof individuals,wecanusethismetrictogaugethecredit riskprofileof home-purchaseborrowers. ThedataarefromtheFRBNY/EquifaxConsumerCreditPanel.Thepanelisanationally representativelongitudinaldatabaseof individualswithdetailedinformation,ataquarterly frequencybeginningin1999,onconsumerandmortgagedebtandloanperformance drawnfromthecreditrecordscollectedandmaintainedbyEquifax,oneof thethree nationalcreditbureaus.36Thedataincludethreekeypiecesof informationwithrespectto thisanalysis:(1)detailsoneachmortgageoutstandingforagivenconsumer,includingthe yearof origination;(2)eachconsumer’screditscoreasof theendof eachquarter;and (3)eachconsumer’sresidentiallocationatthelevelof thecensusblock(asubunitof acensustract).37Thedatausedherearethroughtheendof 2011. Home-purchaseloansarenotexplicitlyidentifiedincreditrecorddata,butthepanel natureof thedatausedhereallowsustofollowagivenindividualovertimeandinfer whetherthatborrowerpurchasedahomeduringanyparticularperiod.Specifically,we classifyanindividualasahomebuyerif thecreditrecordindicatesthatheorshetookouta newmortgageandmovedtoadifferentlocation(thecreditrecordshowsthattheindividual movedfromonecensusblocktoanother).First-timehome-purchaseborrowersareidentifiedinasimilarmanner,buttheircreditrecordsmustshownoevidenceof apreviousmortgage.Thecreditrecorddatashowthatforhome-purchaseborrowersingeneral,aswellas forfirst-timehomebuyersfinancingtheirpurchase,themediancreditscorehasincreased about40pointssince2006.Furthermore,medianscoresnowexceedbyaconsiderablemarginthemedianscoresforhome-purchaseborrowersatanytimeinthepast12years(figure2). Fromtheperspectiveof changesinaccesstocredit,aparticulargrouptofocusonisthat consistingof individualswithscoresinthebottomdecileof allhome-purchaseborrowers. Herethedatashowthatthescorethatdelineatesthebottomdecilehasincreasednearly 50pointssincetheendof 2006.Individualswithscoresbelowthisincreasedthresholdare likelytohaveaverydifficulttimequalifyingforcreditand,if theymanagetoqualifyfora loan,arelikelytopayhigherprices.Consistentwiththisobservation,overall,theshareof home-purchaseborrowerswithscoresbelow620,atraditionaldemarcationlineforindividualswhoaretypicallycharacterizedashavingacredithistorythatwouldbeconsidered subprime,fellfromabout19percentof borrowersattheendof 2006toabout7percentat theendof thethirdquarterof 2011(datanotshownintables). 36 Thedataaredrawnusingamethodologytoensurethatthesameindividualscanbetrackedovertime,andthat thedataarerepresentativeofallindividualswithacreditrecordasoftheendofeachquarter.Formoreinformationonthesedata,seeDonghoonLeeandWilbertvanderKlaauw(2010),“AnIntroductiontothe FRBNYConsumerCreditPanel,”FederalReserveBankofNewYorkStaffReports479(NewYork:Federal ReserveBankofNewYork,November),www.newyorkfed.org/research/staff_reports/sr479.pdf.Itisimportant tonotethatallindividualsinthedatabaseareanonymous:Names,streetaddresses,andSocialSecuritynumbersarenotincludedinthedata.Individualsaredistinguishedandcanbelinkedovertimethrougha unique,anonymousconsumeridentificationnumberassignedbyEquifax. 37 ThiscreditscoreisgeneratedfromtheEquifaxRiskScore3.0model.TheEquifaxRiskScore3.0isacredit scoreproducedfromageneral-purposeriskmodelthatpredictsthelikelihoodanindividualwillbecome 90daysormoredelinquentonanyaccountwithin24monthsafterthescoreiscalculated.TheEquifaxRisk Score3.0rangesfrom280to850,withahigherscorecorrespondingtolowerrelativerisk(formoreinformation,seewww.equifax.com).Fortheexercisehere,wetrackthecreditscoreofeachindividualasofthequarter beforeheorshetookoutamortgage.Althoughthelendermayhaveusedadifferentscoretounderwritethe loan,itislikelythatthescoresusedherearereflectiveofsuchscores.
TheMortgageMarketin2011 155 Lending across Population Figure2.Creditscoresofhome-purchaseborrowers, Groups and Neighborhoods byselectedcreditscorepercentile,1999–2011 Oneof thestrengthsof theHMDA A. All borrowers Credit score dataisthattheannualdatacanbe 850 mergedtotrackchangesinlending 90th 800 75th 750 activityacrosspopulationgroups Median 700 andareas.Inthissection,weshow 25th 650 changesinlending,from2010to 10th 600 2011,toborrowerssortedby 550 income,race,orethnicityandby 500 1999 2001 2003 2005 2007 2009 2011 theincomeorminoritypopulation characteristicsof theareaswhere theyreside.Wealsopresentan B. First-time borrowers Credit score 850 analysisof lendinginareascharac- 800 terizedbytheirdegreeof economic 90th distress. 75th 750 Median 700 650 Changes in Lending, 2010 to 25th 600 2011 10th 550 500 Asnotedearlier,bothhome- 1999 2001 2003 2005 2007 2009 2011 purchaseandrefinancelendingfell from2010to2011.Virtuallyall Note:Themedianisthe50thpercentile.CreditscoreistheEquifaxRisk Score3.0.Formoreinformation,seetextnote37. populationsegmentsexperienced Source:FRBNY/EquifaxConsumerCreditPanel. thesedeclines,althoughthefalloff inactivitywasmoreseverefor somegroupsthanforothers(table14,memoitems).38Acrossracialorethnicgroups,all minoritypopulationsexceptHispanicwhitesexperiencedrelativelylargedeclinesinactivity;Hispanicwhitesandnon-Hispanicwhitesbothexperiencedrelativelysmallerdeclinesin activity.Lower-incomeborrowers,thosepurchasinghomesinlower-incomecensustracts, andthoseresidinginareaswithlargerminoritypopulationsalsoexperiencedrelatively largereductionsinhome-purchaselending. Patternsforrefinancingdifferedfromthoseforhome-purchaselending,asthelargest declineswereamongnon-Hispanicwhites,middle-andhigher-incomeborrowers,and thoseresidinginareaswithsmallersharesof minoritiesandpopulationswithrelatively higherincomes.Theonlygrouptoexperienceanincreaseinrefinancelendingwaslowincomeborrowers;refinancelendingtothispopulationsegmentincreasedabout3percent from2010to2011. Populationsdifferconsiderablyintheiruseof variousloanproducts.Mostnotably,black, Hispanicwhite,andlower-incomeborrowers,andthoseresidinginareaswithlargershares of minoritypopulations,usenonconventionalloanstopurchasehomestoagreaterextent thanothergroups.Greaterrelianceonnonconventionalloansmayreflecttherelativelylow down-paymentrequirementsof theFHAandVAlendingprograms.TheHMDAdataindicatethatallgroupswerealittlelessdependentonnonconventionalloansin2011thanin 2010.Reducedrelianceonnonconventionalloansoccurredforbothhome-purchaseand refinancelending. 38 Changesinlendingtodifferentgroupsoverthe2006–10periodwerepresentedinanearlierarticle.SeeAvery andothers,“TheMortgageMarketin2010.”
156 FederalReserveBulletin|December2012 Table14.Homelendingtodifferentpopulations,bycharacteristicofborrowerandofcensustractand bytypeandpurposeofloan,2010–11 Percentexceptasnoted 2010 2011 Memo: Characteristic Percentage ofborrower changein andof Non- Memo: Non- Memo: number censustract Conventional conventional1 Total Number Conventional conventional1 Total Number ofloans, ofloans ofloans 2010–11 A.Homepurchase Borrower Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 33.8 66.2 100 11,183 36.5 63.5 100 9,435 -15.6 Asian 73.4 26.6 100 119,762 74.3 25.7 100 104,626 -12.6 BlackorAfricanAmerican 18.9 81.1 100 133,969 21.6 78.4 100 113,591 -15.2 NativeHawaiianorother PacificIslander 32.4 67.6 100 7,671 35.1 64.9 100 6,661 -13.2 White,byethnicity2 Hispanicwhite 26.5 73.5 100 207,108 29.2 70.8 100 195,778 -5.5 Non-Hispanicwhite 50.3 49.7 100 1,504,464 53.3 46.7 100 1,417,339 -5.8 Incomeratio(percentofareamedian)3 Low 38.3 61.7 100 281,788 39.9 60.1 100 254,828 -9.6 Moderate 34.9 65.1 100 552,928 37.3 62.7 100 495,859 -10.3 Middle 41.4 58.6 100 567,223 43.9 56.1 100 519,898 -8.3 High 63.0 37.0 100 816,394 65.9 34.1 100 790,223 -3.2 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 54.3 45.7 100 806,008 56.4 43.6 100 767,580 -4.8 10–49 45.6 54.4 100 1,105,335 48.8 51.2 100 1,025,746 -7.2 50–79 37.5 62.5 100 197,401 41.0 59.0 100 169,409 -14.2 80–100 31.4 68.6 100 109,589 33.7 66.3 100 98,073 -10.5 Incomeratio(percentofareamedian)4 Low 39.7 60.3 100 25,879 45.0 55.0 100 21,128 -18.4 Moderate 35.9 64.1 100 242,761 39.8 60.2 100 206,299 -15.0 Middle 41.6 58.4 100 1,107,033 44.3 55.7 100 1,029,115 -7.0 High 58.1 41.9 100 819,505 60.7 39.3 100 791,254 -3.4 B.Refinance Borrower Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 76.8 23.2 100 11,981 77.6 22.4 100 10,991 -8.3 Asian 95.3 4.7 100 232,177 95.8 4.3 100 204,917 -11.7 BlackorAfricanAmerican 58.1 41.9 100 129,828 62.5 37.6 100 119,267 -8.1 NativeHawaiianorother PacificIslander 75.5 24.5 100 9,925 77.3 22.8 100 8,595 -13.4 White,byethnicity2 Hispanicwhite 75.1 24.9 100 190,507 79.0 21.0 100 176,431 -7.4 Non-Hispanicwhite 86.3 13.7 100 3,359,573 87.7 12.3 100 2,826,443 -15.9 Incomeratio(percentofareamedian)3 Low 54.5 45.5 100 631,539 62.4 37.6 100 648,323 2.7 Moderate 85.6 14.4 100 635,461 87.9 12.1 100 529,877 -16.6 Middle 87.7 12.3 100 1,017,330 89.1 10.9 100 821,444 -19.3 High 93.2 6.8 100 2,231,764 93.7 6.3 100 1,840,400 -17.5 Note:First-lienmortgagesforowner-occupiedone-tofour-familyhomes. 1 Seetable4,note1. 2 Categoriesforraceandethnicityreflecttherevisedstandardsestablishedin1997bytheOfficeofManagementandBudget.Applicantsare placedunderonlyonecategoryforraceandethnicity,generallyaccordingtotheraceandethnicityofthepersonlistedfirstonthe application.However,underrace,theapplicationisdesignatedasjointifoneapplicantreportedthesingledesignationofwhiteandtheother reportedoneormoreminorityraces.Iftheapplicationisnotjointbutmorethanoneraceisreported,thefollowingdesignationsaremade:If atleasttwominorityracesarereported,theapplicationisdesignatedastwoormoreminorityraces;ifthefirstpersonlistedonan applicationreportstworaces,andoneiswhite,theapplicationiscategorizedundertheminorityrace.Forloanswithtwoormoreapplicants, lenderscoveredundertheHomeMortgageDisclosureActreportdataononlytwo.
TheMortgageMarketin2011 157 Table14.Homelendingtodifferentpopulations,bycharacteristicofborrowerandofcensustractand bytypeandpurposeofloan,2010–11—continued Percentexceptasnoted 2010 2011 Memo: Characteristic Percentage ofborrower changein andof Non- Memo: Non- Memo: number censustract Conventional conventional1 Total Number Conventional conventional1 Total Number ofloans, ofloans ofloans 2010–11 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 87.5 12.5 100 2,014,629 88.6 11.4 100 1,662,511 -17.5 10–49 84.7 15.3 100 2,114,604 85.9 14.1 100 1,825,725 -13.7 50–79 81.6 18.4 100 266,896 83.5 16.5 100 241,937 -9.4 80–100 72.9 27.1 100 119,965 77.4 22.6 100 109,871 -8.4 Incomeratio(percentofareamedian)4 Low 74.6 25.4 100 23,202 79.9 20.1 100 20,390 -12.1 Moderate 77.0 23.0 100 301,623 80.3 19.7 100 264,107 -12.4 Middle 82.4 17.6 100 2,094,968 83.8 16.2 100 1,779,036 -15.1 High 90.0 10.0 100 2,066,948 90.7 9.3 100 1,753,976 -15.1 C.Homeimprovement5 Borrower Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 96.2 3.8 100 1,749 96.7 3.3 100 1,787 2.2 Asian 98.0 2.0 100 5,771 97.4 2.6 100 5,857 1.5 BlackorAfricanAmerican 91.3 8.7 100 17,993 93.0 7.0 100 17,964 -.2 NativeHawaiianorother PacificIslander 95.9 4.1 100 764 95.9 4.1 100 752 -1.6 White,byethnicity2 Hispanicwhite 95.2 4.8 100 19,935 95.8 4.2 100 20,733 4.0 Non-Hispanicwhite 96.4 3.6 100 238,623 96.6 3.4 100 227,534 -4.6 Incomeratio(percentofareamedian)3 Low 93.9 6.1 100 46,348 93.0 7.0 100 45,672 -1.5 Moderate 96.2 3.8 100 63,060 95.1 4.9 100 61,778 -2.0 Middle 96.2 3.8 100 78,086 95.2 4.8 100 75,804 -2.9 High 97.2 2.8 100 127,660 96.4 3.6 100 124,873 -2.2 Censustractofproperty Racialorethniccomposition(minoritiesasapercentofpopulation) Lessthan10 97.2 2.8 100 160,410 96.2 3.8 100 154,798 -3.5 10–49 95.7 4.3 100 117,947 94.8 5.2 100 116,021 -1.6 50–79 95.2 4.8 100 17,870 92.8 7.2 100 17,742 -.7 80–100 92.9 7.1 100 18,927 93.4 6.6 100 19,566 3.4 Incomeratio(percentofareamedian)4 Low 92.2 7.8 100 3,263 87.5 12.5 100 3,393 4.0 Moderate 95.0 5.0 100 36,461 94.3 5.7 100 35,492 -2.7 Middle 96.1 3.9 100 177,310 95.7 4.3 100 170,938 -3.6 High 96.9 3.1 100 92,906 96.2 3.8 100 91,865 -1.1 3 Borrowerincomeisthetotalincomereliedonbythelenderintheloanunderwriting.Incomeisexpressedrelativetothemedianfamily incomeofthemetropolitanstatisticalarea(MSA)orstatewidenon-MSAinwhichthepropertybeingpurchasedislocated.“Low”islessthan 50percentofthemedian;“moderate”is50percentto79percent(inthisarticle,“lowerincome”encompassesthelowandmoderate categories);“middle”is80percentto119percent;and“high”is120percentormore. 4 TheincomecategoryofacensustractisthemedianfamilyincomeofthetractrelativetothatoftheMSAorstatewidenon-MSAinwhich thetractislocatedasderivedfromthe2000census.“Low”islessthan50percentofthemedian;“moderate”is50percentto79percent; “middle”is80percentto119percent;and“high”is120percentormore. 5 Consistsoffirst-andjunior-lienloansandloanswithoutalien.
158 FederalReserveBulletin|December2012 Credit Circumstances in Distressed Neighborhoods Sincethestartof thehousingdownturn,accesstomortgagecredithasbeenanacutepublic policyconcern,particularlyforhouseholdswithlowerincomesorinneighborhoodsthat havebeenhardesthitbyforeclosures.Mortgageoriginationshavedeclinedbroadlysince 2005,and,aswediscussedinthereviewof lastyear’sHMDAdata,thesedeclineshave beengreaterinhighlydistressedneighborhoods.Todetermineif credithasyetbegunto flowmorefreelyinsuchneighborhoods,weusetheHMDAdatatocomparemortgage creditflowsfrom2010to2011. Asinlastyear’sreview,weidentifydistressedneighborhoodsusingthescoresproducedby theDepartmentof HousingandUrbanDevelopment(HUD)fortheNSP.39TheNSPwas createdbytheHousingandEconomicRecoveryActof 2008toprovidefundsforstateand localgovernmentsseekingtosupportneighborhoodswithhighlevelsof propertyabandonmentandforeclosure.Indecidingwhichneighborhoodstotarget,HUDusesastatistical modelthatestimatesthelikelihoodthattheneighborhoodisexperiencinghighratesof foreclosureandmortgagedelinquency.Theoutputsof thismodelareusedtoassigntoeach tractanNSPscorerangingfrom1to20,withahigherscoreindicatingagreaterlikelihood of distressandwiththescoresscaledsothateachscorepointisgivento5percentof census tracts.Whileanevaluationof thesuccessof theNSPitself iswellbeyondthescopeof this article,wecanusethesescorestoclassifycensustractsaccordingtothedegreeof distress theyface. Thechangefrom2010to2011inhome-purchaselendingforowner-occupiedproperties, brokendownbyquintilesof theNSPscore,isshownintable15.Lendingdeclined7.2percentoverall,thoughthedeclinesweresubstantiallygreaterinhigh-distressneighborhoods. IntractswithNSPscoresof 17to20,home-purchaselendingdecreased13.8percent,comparedwith3.3percentintractswithNSPscoresbelow5.Thesteeperdeclineinmortgage creditflowstohighlydistressedareascontinuesatrendthathasbeenobservedsincethe onsetof thehousingmarketdownturn. Differencesintheextentof declinearealsoobservedacrossborrowerincomelevels.Lendingfellmoresubstantiallyforlower-andmiddle-incomeborrowers(12.3percentand 11.3percent,respectively)thanitdidforhigh-incomeborrowers(3.8percent).Indeed,for high-incomeborrowers,thedeclineinlendingappearsunrelatedtothedegreeof neighborhooddistress,asindicatedbythenonmonotonicrelationshipbetweenlendingdeclinesand NSPscorequintile.However,forlower-andmiddle-incomeborrowers,thedecreaseswere notablylargerwhenneighborhooddistressincreased.Somewhatsurprisingly,lendingto middle-incomeborrowersfellmorethanitdidforlower-incomeborrowersinthebottom threequintilesof theNSPscore(scoresof 1to12).IntractswithNSPscoresabove12, lendingtolower-incomeborrowersfelloff byalargerpercentagethanitdidforhighincomeborrowers. Attributingthesedeclinestosupply-ordemand-sidefactorsisnotstraightforward.As shownintable15,thenumberof applicationsforhome-purchaseloansfellbyslightlymore thanthenumberof loanoriginations,apatternthatholdsforalmostallNSPquintiles.The sharperdeclineinapplicationssuggeststhatreducedmortgageflowsmayprimarilyreflect adropindemand;however,sincepotentialapplicantsmayhaveforegoneapplyingbecause theysuspectedtheirapplicationwouldbedenied,thesharperfallinapplicationsisinsufficienttoprovethatthesedeclinesrepresentdemand-sidefactorsalone.Mostlikely,these changesreflectacombinationof changesinsupplyanddemand. 39 SeeAveryandothers,“TheMortgageMarketin2010.”
TheMortgageMarketin2011 159 Table15.LoancharacteristicsrelatedtolendinginareasgroupedbyNeighborhoodStabilization Programscore,2011 Percentchangeinhome-purchaselendingfrom2010to2011 NSPscore1 Characteristic 1–4 5–8 9–12 13–16 17–20 All Memo Loans -3.3 -7.1 -9.3 -9.9 -13.8 -7.2 Applications -3.9 -7.3 -9.0 -10.1 -15.4 -7.8 Borrower Incomeratio(percentofareamedian)2 Lower -7.4 -9.6 -11.4 -13.6 -19.6 -12.3 Middle -8.4 -10.4 -12.2 -12.9 -16.5 -11.3 High -1.6 -5.1 -6.8 -5.1 -5.7 -3.8 Minority3 -4.7 -10.1 -11.2 -13.1 -14.8 -10.1 Originatinginstitution Bank -2.9 -7.0 -9.7 -10.3 -17.6 -7.1 Thrift -20.2 -28.1 -30.2 -26.4 -18.0 -24.1 Creditunion 6.6 10.8 9.2 8.9 11.2 8.5 Independentmortgagebank 4.6 -.6 -3.2 -6.4 -11.2 -2.3 Top10organization -14.4 -16.6 -19.3 -18.5 -22.6 -17.1 Non–top10organization 2.6 -2.9 -4.9 -6.1 -9.9 -2.6 Note:Firstandjuniorliensforowner-occupiedone-tofour-familypropertiesinmetropolitanareas.Dataarethepercentchangeinthedollar valueoflending. 1 TheNeighborhoodStabilizationProgram(NSP)scoreisbasedontheNSP3scorecreatedbytheDepartmentofHousingandUrban Development.TheNSPscoreclassifiescensustractsinto5percent“buckets”onarangeof1to20,with1beingthebesttractsand20 beingtheworstintermsofavarietyoffactors,suchasforeclosurerates.NSPscoresdetermineeligibilityforNSPfunding;censustracts withthehighestscoresareconsideredthetractswiththegreatestneedforsupport.Seetextforfurtherdetails. 2 Borrowerincomeisthetotalincomerelieduponbythelenderintheloanunderwriting.Incomeisexpressedrelativetothemedianfamily incomeofthemetropolitanstatisticalarea(MSA)orstatewidenon-MSAinwhichthepropertybeingpurchasedislocated.“Lower”isless than80percentofthemedian;“middle”is80percentto119percent;and“high”is120percentormore. 3 Seetable14,note2.Minorityborrowersareborrowersotherthannon-Hispanicwhites. Source:DepartmentofHousingandUrbanDevelopment;FederalFinancialInstitutionsExaminationCouncil,datareportedundertheHome MortgageDisclosureAct. Onesupplyfactorthatmaybeinfluencinghowmortgagecreditisflowingisthemixof lendersextendingcredit.Inpercentageterms,thelargestchangesinvolvedthriftinstitutions,whoselendingfellbyalmostone-fourthin2011,andcreditunions,whoselending increasedbyover8percent.Whiletheseinstitutiontypesaccountedforonlyasmallshare of lendingin2011(13percent;datanotshownintable),inneithercasewasthereaclear relationshipbetweenthechangeinlendingandthedegreeof neighborhooddistress. Instead,themorerapiddeclineinlendingtodistressedneighborhoodsappearstoinvolve lendingbycommercialbanksandindependentmortgagecompanies.Bothinstitutiontypes experiencedlargerdeclinesinlendingtotractswithhigherNSPscores.Whilelendingby commercialbankswasdownin2011forallNSPquintiles,lendingbyindependentmortgagecompaniesincreasedintractsintheleastamountof distress(thebottomquintileof NSPscores)in2011andfell11percentintractsinthemostdistress.Nevertheless,both institutiontypeshadaspreadof about15percentagepointsbetweenthechangesinlendinginthehighestandlowestNSPquintiles. Inadditiontotypesof lenders,wecanalsoexaminelendingactivitybylargestlenders. Home-purchaselendingbythe10largestlendersin2011fellmoresharplyin2011(17percent)thanlendingbyotherfinancialinstitutions(2.6percent).However,lendingbyboth declinedmoreinhighlydistressedneighborhoodsthaninneighborhoodsexperiencingless distress.
160 FederalReserveBulletin|December2012 Theresultsof thisanalysissuggestthathighlydistressedneighborhoodscontinuetoexperiencereducedmortgageflows,whichmirrorsthepatternobservedforthe2005–10period discussedinlastyear’sreview.Thesedeclineswereparticularlypronouncedforlowerincomeborrowers.Andwhileitisdifficulttoapportionthesedeclinestodemandandsupplyconsiderations,thesharperdeclinesindistressedareasappear,forthemostpart,to havebeenwidespreadacrosslenders. Differences in Lending Outcomes by Race, Ethnicity, and Sex of the Borrower OnereasontheCongressamendedHMDAin1989wastoenhanceitsvalueforfairlending enforcementbyaddingtotheitemsreportedthedispositionof applicationsforloansand therace,ethnicity,andsexof applicants.Asimilarmotivationunderlaythedecisiontoadd pricingdataforhigher-pricedloansin2004,althoughsuchdataserveotherpurposes, includingtohelpidentifylendersactiveinthehigher-costorhigher-risksegmentsof the mortgagemarketandprovideinformationonthevolumeandlocationsof borrowers receivinghigher-pricedloans. Overtheyears,analysesof HMDAdatahaveconsistentlyfoundsubstantialdifferencesin theincidenceof higher-pricedlendingandinapplicationdenialratesacrossracialandethniclines,differencesthatcannotbefullyexplainedbyfactorsincludedintheHMDA data.40AnalysesalsohavefoundthatdifferencesacrossgroupsinmeanAPRspreadspaid bythosewithhigher-pricedloansweregenerallysmall.41Hereweexaminethe2011 HMDAdatatodeterminetheextenttowhichthesedifferencespersist. Theanalysisherepresentsaggregatedlendingoutcomesacrossallreportinginstitutions. Patternsforanygivenfinancialinstitutionmaydifferfromthoseshown,andforanygiven financialinstitution,relationshipsmayvarybyloanproduct,geographicmarket,andloan purpose.Further,althoughtheHMDAdataincludesomedetailedinformationabouteach mortgagetransaction,manykeyfactorsthatareconsideredbylendersincreditunderwritingandpricingarenotincluded.Accordingly,itisnotpossibletodeterminefromHMDA dataalonewhetherracialandethnicpricingdisparitiesreflectillegaldiscrimination.However,analysisusingtheHMDAdatacanaccountforsomefactorsthatarelikelyrelatedto thelendingprocess.Giventhatlendersofferawidevarietyof loanproductsforwhichbasic termsandunderwritingcriteriacandiffersubstantially,theanalysisherecanonlybe viewedassuggestive. Comparisonsof averageoutcomes(bothloanpricinganddenials)foreachracial,ethnic, orgendergrouparemadebothbeforeandafteraccountingfordifferencesintheborrowerrelatedfactorscontainedintheHMDAdata(income;loanamount;locationof theproperty,orMSA;andpresenceof aco-applicant)andfordifferencesinborrower-related factorsplusthespecificlendinginstitutionusedbytheborrower.42Comparisonsforlend- 40 SeeAvery,Brevoort,andCanner,“The2006HMDAData”;Avery,Brevoort,andCanner,“Higher-Priced HomeLendingandthe2005HMDAData”;andAvery,Canner,andCook,“NewInformationReportedunder HMDA.” 41 See,forexample,AndrewHaughwout,ChristopherMayer,andJosephTracy(2009),“SubprimeMortgage Pricing:TheImpactofRace,Ethnicity,andGenderontheCostofBorrowing,”FederalReserveBankofNew YorkStaffReports368(NewYork:FederalReserveBankofNewYork,April),www.newyorkfed.org/research/ staff_reports/sr368.pdf;andMarshaJ.Courchane(2007),“ThePricingofHomeMortgageLoanstoMinority Borrowers:HowMuchoftheAPRDifferentialCanWeExplain?”JournalofRealEstateResearch,vol.29(4), pp.399–439. 42 Excludedfromtheanalysisareapplicantsresidingoutsidethe50statesandtheDistrictofColumbiaaswellas applicationsdeemedtobebusinessrelated.Applicantgenderiscontrolledforintheracialandethnicanalyses, andraceandethnicityarecontrolledforintheanalysesofgenderdifferences.
TheMortgageMarketin2011 161 ingoutcomesacrossgroupsareof threetypes:gross(or“unmodified”),modifiedto accountforborrower-relatedfactors(or“borrowermodified”),andmodifiedtoaccount forborrower-relatedfactorspluslender(or“lendermodified”).43Theanalysisheredistinguishesbetweenconventionalandnonconventionallending,reflectingthedifferentunderwritingstandardsandfeesassociatedwiththesetwobroadloanproductcategories.44 Incidence of Higher-Priced Lending by Race and Ethnicity and Sex Asnotedearlier,2010wasthefirstHMDAreportingyearforwhichallof theloanssubject tohigher-pricedloanreportingusedthenewFreddieMacPMMSthreshold(thePMMS thresholdwasalsousedforthelastthreemonthsof 2009).BeforeOctober1,2009,a Treasury-basedthresholdwasused.Thechangeinthresholdmakesitproblematictocomparethereportedincidenceof higher-pricedlendingin2010or2011withtheincidence reportedforpreviousyears.Nevertheless,inpreviousarticles,wehaveemployedamethodologythatadjustedtheTreasury-basedspreadtoaspreadoverthe30-yearfixed-ratemortgageAPORreportedinthePMMS.Foralmostallof theperiodfrom2006to2009,this methodologygaveagoodapproximationof theincidenceof loanswithAPORspreads morethan1.75percentagepointsabovethePMMS(25basispointshigherthanthecutoff forhigher-pricedreportingin2010).Calculationsusingthe“adjustedspread”showedthat theestimatedincidenceof loansmorethan1.75percentagepointsabovethePMMSissignificantlyreducedfrom2006to2008forallracialandethnicgroupsandthatthedifferencesacrossgroupsareconsiderablysmallersince2008thanintheyearsprior.45Data reportedforthelastthreemonthsof 2009usingthenewthresholdshowedonlymodestdifferencesacrossgroups. Asnotedearlier,theoverallreportedincidenceof higher-pricedlendingwasabout50basis pointshigherin2011thanin2010(datafor2010notshownintables).Pricingrelationships observedinthe2011HMDAdataareverysimilartothosefoundinthe2010data.The 2011HMDAdataindicatethatblackandHispanic-whiteborrowersaremorelikely,and Asianborrowerslesslikely,toobtainconventionalloanswithpricesabovetheHMDA price-reportingthresholdsthanarenon-Hispanicwhiteborrowers.Theserelationshipshold bothforhome-purchaseandrefinancelendingandfornonconventionalloans(tables16.A and16.B).Forexample,forconventionalhome-purchaselendingin2011,theincidenceof higher-pricedlendingwas7.8percentforblackborrowers,7.3percentforHispanicwhite borrowers,and1.3percentforAsianborrowers,comparedwith3.9percentfornon- Hispanicwhiteborrowers. Thegrossdifferencesintheincidenceof higher-pricedlendingbetweennon-Hispanic whitesandblacksorHispanicwhitesin2011aresignificantlyreduced,butnotcompletely eliminated,aftercontrollingforlenderandborrowercharacteristics.Forexample,thegross 2011differenceintheincidenceof higher-pricedconventionallendingforhome-purchase loansbetweenHispanicwhitesandnon-Hispanicwhitesof 3.4percentagepointsfallsto onlyabout0.55percentagepointwhentheotherfactorsavailablewithintheHMDAdata areaccountedfor.Thelargegapinpricingbetweenblacksandnon-Hispanicwhitesissimilarlyreducedwhenotherfactorsareconsidered.Thepricingdisparitiesacrossgroupsare significantlylowerthanthehigher-pricedincidencedisparitiesobservedfrom2004to2007 usingboththeoldTreasury-basedthresholdandourPMMS-basedadjustedspread. 43 Forpurposesofpresentation,theborrower-andlender-modifiedoutcomesshowninthetablesarenormalized sothat,forthebasecomparisongroup(non-Hispanicwhitesinthecaseofcomparisonbyraceandethnicity andmalesinthecaseofcomparisonbysex),themeanateachmodificationlevelisthesameasthegrossmean. 44 Althoughresultsherearereportedfornonconventionallendingasawhole,theanalysiscontrolsforthespecific typeofgovernment-backedloanprogram(FHA,VA,orFSA/RHS)usedbytheborrowerorloanapplicant. 45 SeeAveryandothers,“The2008HMDAData.”
162 FederalReserveBulletin|December2012 Table16.Incidenceofhigher-pricedlending,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeofloanandbyrace,ethnicity,andsexofborrower,2011 A.Conventionalloan Percentexceptasnoted Modifiedincidence,by Modifiedincidence,by modificationfactor modificationfactor Numberof Unmodified Numberof Unmodified loans incidence Borrower- loans incidence Borrower- Race,ethnicity,andsex Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 2,905 7.85 4.42 4.14 8,313 3.14 2.46 1.82 Asian 77,211 1.32 3.28 3.70 195,610 .31 .93 1.48 BlackorAfricanAmerican 21,655 7.84 6.52 4.69 73,397 4.21 3.19 2.36 NativeHawaiianorotherPacific Islander 2,285 2.76 3.98 4.23 6,593 1.18 1.88 2.26 Twoormoreminorityraces 395 2.28 3.12 3.87 1,405 .85 2.06 1.96 Joint 15,158 2.91 4.17 4.16 48,823 .97 1.67 1.72 Missing 84,659 1.67 2.78 3.90 339,272 .74 1.09 1.64 White,byethnicity1 Hispanicwhite 43,569 7.25 5.68 4.40 110,493 2.41 2.09 2.00 Non-Hispanicwhite 736,713 3.85 3.85 3.85 2,496,791 1.62 1.62 1.62 Sex Onemale 274,116 3.92 3.92 3.92 655,790 1.79 1.79 1.79 Onefemale 192,796 3.55 3.27 3.63 522,500 1.99 1.70 1.72 Twomales 10,304 7.00 7.00 7.00 22,219 2.00 2.00 2.00 Twofemales 7,924 4.76 5.41 6.97 22,594 2.07 1.77 2.16 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“notapplicable.”Fordefinitionof higher-pricedlendingandexplanationofmodificationfactors,seetextandtable9,note3.Loanstakenoutjointlybyamaleandfemalearenot tabulatedherebecausetheywouldnotbedirectlycomparablewithloanstakenoutbyoneborrowerorbytwoborrowersofthesamesex. 1 Seetable14,note2. Withregardtothegenderof applicants,wefindrelativelysmalldifferencesintheincidence of higher-pricedlendingbetweensingleapplicantsof differentgendersanddualapplicants of differentgendersonceallavailablefactorsaretakenintoaccount. Rate Spreads by Race, Ethnicity, and Sex The2011dataindicatethatamongborrowerswithhigher-pricedloans,thegrossAPOR spreadsaresimilaracrossgroupsforbothhome-purchaseandrefinancelending.This resultholdsforbothconventional(table17.A)andnonconventionallending(table17.B). Forexample,forconventionalhome-purchaseloans,thegrossmeanAPORspreadwas 2.49percentagepointsforblackborrowersand2.76percentagepointsforHispanicwhite borrowers,whileitwas2.49percentagepointsfornon-Hispanicwhiteborrowersand 2.41percentagepointsforAsianborrowers.Accountingforborrower-relatedfactorsorthe specificlenderusedbytheborrowershaslittleeffectonthedifferencesacrossgroups. Denial Rates by Race, Ethnicity, and Sex Analysesof theHMDAdatainpreviousyearshaveconsistentlyfoundthatdenialrates varyacrossapplicantsgroupedbyraceorethnicity.Thiscontinuestobethecasein2011. Asinpastyears,blacksandHispanicwhiteshadnotablyhighergrossdenialratesin2011 thannon-Hispanicwhites,whilethedifferencesbetweenAsiansandnon-Hispanicwhites
TheMortgageMarketin2011 163 Table16.Incidenceofhigher-pricedlending,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeofloanandbyrace,ethnicity,andsexofborrower,2011 B.Nonconventionalloan Percentexceptasnoted Modifiedincidence,by Modifiedincidence,by modificationfactor modificationfactor Numberof Unmodified Numberof Unmodified loans incidence Borrower- loans incidence Borrower- Race,ethnicity,andsex Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 5,754 2.78 2.91 2.09 2,312 5.02 3.74 2.83 Asian 26,746 2.09 2.01 2.02 8,577 4.03 3.92 4.06 BlackorAfricanAmerican 87,774 4.16 3.53 3.10 44,070 10.80 7.33 5.24 NativeHawaiianorotherPacific Islander 4,288 2.64 2.46 2.57 1,913 3.50 3.58 4.06 Twoormoreminorityraces 681 .88 1.35 1.59 308 4.55 5.33 4.21 Joint 15,364 1.75 2.37 2.51 9,617 2.67 4.50 4.58 Missing 74,377 2.89 3.57 2.30 55,264 2.32 3.06 4.64 White,byethnicity1 Hispanicwhite 120,229 4.78 2.79 2.59 28,384 6.50 4.20 4.23 Non-Hispanicwhite 660,368 2.35 2.35 2.35 344,076 5.94 5.94 5.94 Sex Onemale 359,311 2.91 2.91 2.91 147,966 4.72 4.72 4.72 Onefemale 234,298 3.89 2.92 2.91 81,252 12.04 6.03 5.56 Twomales 13,567 2.94 2.94 2.94 3,692 2.76 2.76 2.76 Twofemales 10,629 3.24 3.36 3.54 3,261 4.60 4.07 4.66 Note:Seenotestotable16.A. generallywerefairlysmallbycomparison(tables18.Aand18.B).Forexample,thedenial ratesforconventionalhome-purchaseloanswere30.9percentforblacks,21.7percentfor Hispanicwhites,14.8percentforAsians,and11.9percentfornon-Hispanicwhites.The patternwasaboutthesamefornonconventionalhome-purchaselending,althoughthegap ingrossdenialratesbetweenblacksorHispanicwhitesandnon-Hispanicwhiteswasnotablysmallerthanforconventionalhome-purchaseloans. Forbothconventionalandnonconventionalhome-purchaselending,controllingfor borrower-relatedfactorsintheHMDAdatagenerallyreducesthedifferencesamongracial andethnicgroups.Accountingforthespecificlenderusedbytheapplicantreducesdifferencesfurther,althoughunexplaineddifferencesremainbetweennon-Hispanicwhitesand otherracialandethnicgroups.Ananalysisof refinanceloansshowssimilarpatterns, althoughthedifferencesingrossdenialratesbetweenblacksandnon-Hispanicwhitesand betweenHispanicwhitesandnon-Hispanicwhitestendtobelargerthanforhomepurchaselending.Forexample,thegrossdifferencebetweenblackandnon-Hispanic-white borrowersrefinancingusingaconventionalloanwas20.5percentagepoints. Some Limitations of the Data in Assessing Fair Lending Compliance Previousresearchandexperiencegainedinthefairlendingenforcementprocessshowthat unexplaineddifferencesintheincidenceof higher-pricedlendingandindenialratesamong racialorethnicgroupsstem,atleastinpart,fromcredit-relatedfactorsnotavailableinthe HMDAdata,suchascredithistory(includingcreditscores),loan-to-valueratios,anddifferencesinloancharacteristics.Differentialcostsof loanoriginationandthecompetitive
164 FederalReserveBulletin|December2012 Table17.Meanaverageprimeofferratespreads,unmodifiedandmodifiedforborrower-and lender-relatedfactors,forhigher-pricedloansonone-tofour-familyhomes,bytypeandpurposeof loanandbyrace,ethnicity,andsexofborrower,2011 A.Conventionalloan Percentexceptasnoted Modifiedmeanspread, Modifiedmeanspread, bymodificationfactor bymodificationfactor Numberof Numberof Unmodified Unmodified higher-priced higher-priced Race,ethnicity,andsex loans1 meanspread Borrower- Borrower- loans1 meanspread Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 228 2.93 2.80 2.70 261 2.71 2.55 2.58 Asian 1,016 2.41 2.49 2.46 601 2.43 2.36 2.49 BlackorAfricanAmerican 1,698 2.49 2.67 2.54 3,087 2.99 2.91 2.66 NativeHawaiianorother PacificIslander 63 2.26 2.95 2.63 78 2.42 2.62 2.61 Twoormoreminorityraces 9 2.68 3.61 2.52 12 1.98 2.34 2.67 Joint 441 2.49 2.48 2.49 476 2.48 2.56 2.56 Missing 1,415 2.29 2.29 2.48 2,514 2.52 3.13 2.56 White,byethnicity2 Hispanicwhite 3,160 2.76 2.71 2.55 2,660 2.84 2.56 2.55 Non-Hispanicwhite 28,356 2.49 2.49 2.49 40,456 2.53 2.53 2.53 Sex Onemale 9,073 2.54 2.54 2.54 10,679 2.72 2.72 2.72 Onefemale 5,767 2.48 2.48 2.51 9,937 2.80 2.73 2.72 Twomales 721 2.58 2.58 2.58 445 2.54 2.54 2.54 Twofemales 377 2.55 2.51 2.52 467 2.68 2.56 2.49 Note:Fordefinitionofhigher-pricedlendingandexplanationofmodificationfactors,seetext.Loanstakenoutjointlybyamaleandfemaleare nottabulatedherebecausetheywouldnotbedirectlycomparablewithloanstakenoutbyoneborrowerorbytwoborrowersofthesamesex. Fordefinitionofaverageprimeofferratespread,seetable11,note1. 1 Seetable9,note3. 2 Seetable14,note2. environmentalsomaybearonthedifferencesinpricing,asmaydifferencesacrosspopulationsincredit-shoppingactivities. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency FairLendingExaminationProcedures.46Theavailabilityof broaderinformationallowsthe examinerstodrawfirmconclusionsaboutinstitutioncompliancewiththefairlendinglaws. ItisimportanttokeepinmindthattheHMDAdata,ascurrentlyconstituted,canbeused onlytodetectdifferencesinpricingacrossgroupsforloanswithAPRsabovethereporting threshold;pricingdifferencesmayexistamongloansbelowthethreshold.Thisgapinthe loanpricinginformationwillbeaddressedincomingyearsastheConsumerFinancialProtectionBureauimplementstheexpandeddatareportingrequirementssetforthinthe 46 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf.
TheMortgageMarketin2011 165 Table17.Meanaverageprimeofferratespreads,unmodifiedandmodifiedforborrower-and lender-relatedfactors,forhigher-pricedloansonone-tofour-familyhomes,bytypeandpurposeof loanandbyrace,ethnicity,andsexofborrower,2011 B.Nonconventionalloan Percentexceptasnoted Modifiedmeanspread, Modifiedmeanspread, bymodificationfactor bymodificationfactor Numberof Numberof Unmodified Unmodified higher-priced higher-priced Race,ethnicity,andsex loans1 meanspread Borrower- Borrower- loans1 meanspread Borrower- Borrowerrelated related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly2 AmericanIndianorAlaska Native 160 1.78 1.91 1.95 116 2.49 2.50 2.53 Asian 558 2.10 1.96 1.93 346 2.35 2.30 2.38 BlackorAfricanAmerican 3,651 1.94 1.93 1.96 4,758 2.63 2.55 2.49 NativeHawaiianorother PacificIslander 113 1.91 1.95 1.95 67 2.44 2.47 2.24 Twoormoreminorityraces 6 2.07 1.89 2.01 14 2.25 2.23 2.22 Joint 269 1.97 2.00 1.97 257 2.36 2.59 2.45 Missing 2,151 2.21 2.18 1.98 1,281 3.33 4.42 2.32 White,byethnicity2 Hispanicwhite 5,749 1.88 1.92 1.96 1,845 2.47 2.39 2.44 Non-Hispanicwhite 15,531 1.96 1.96 1.96 20,442 2.44 2.44 2.44 Sex Onemale 10,449 1.93 1.93 1.93 6,977 2.60 2.60 2.60 Onefemale 9,114 1.99 1.95 1.93 9,785 2.63 2.65 2.64 Twomales 399 1.90 1.90 1.90 102 2.17 2.17 2.17 Twofemales 344 1.85 1.84 1.92 150 2.30 2.16 2.23 Note:Seenotestotable17.A. Dodd–FrankWallStreetReformandConsumerProtectionActof 2010,includingtheprovisionrequiringthereportingof ratespreadinformationforallloans. Assessing the Accuracy of Borrower Income Reported in the HMDA Data Duringthehousingboomof the2000s,oneunderwritingpracticethatproliferatedwasthe grantingof mortgageswithlittleornodocumentationof incomeandassets.Toinvestigate theextenttowhichborrowerincomesmayhavebeenoverstatedonmortgageapplications asaresultof suchpractices,wecomparetheincomesreportedforhome-purchaseborrowersintheHMDAdatawiththeincomesof homebuyerstakingoutmortgagesreportedin Census2000andtheACSfor2005through2010.47Whileincentivestooverstateincomeon mortgageapplicationssometimesexist,nosuchincentiveexistswhenreportingincomefor thecensusorACS.Thus,theCensus2000andACSdatamayprovide“true”measuresof incomeof homebuyerswithwhichtogaugetheaccuracyof incomereportedonmortgage applications.48 47 Othershaveconductedsimilarresearch,comparingHMDAdatawithAmericanHousingSurveydataforthe years1995through2007.OuranalysisconfirmsandexpandsontheirsbycomparingHMDAdatawitha differentdatasourceandbyextendingtheanalysisthrough2010.SeeMcKinleyL.BlackburnandToddVermilyea(2012),“ThePrevalenceandImpactofMisstatedIncomesonMortgageLoanApplications,”Journalof HousingEconomics,vol.21(June),pp.151–68. 48 Therearecircumstanceswhenapplicantsformortgagesdonotneedtoreportallincometoaprospectivelender
166 FederalReserveBulletin|December2012 Table18.Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeofloanandbyrace,ethnicity,andsexofapplicant,2011 A.Conventionalloanapplication Percentexceptasnoted Modifieddenialrate, Modifieddenialrate, Numberof bymodificationfactor Numberof bymodificationfactor applications Unmodified applications Unmodified actedupon denialrate Borrower- actedupon denialrate Borrower- Race,ethnicity,andsex bylender Borrower- related bylender Borrower- related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 4,165 23.8 21.3 16.1 14,554 36.2 35.0 28.8 Asian 99,848 14.8 14.8 13.5 266,844 19.3 23.1 23.4 BlackorAfricanAmerican 34,475 30.9 24.2 21.3 138,918 40.5 36.3 32.1 NativeHawaiianorotherPacific Islander 3,130 20.3 16.1 15.1 10,738 31.9 31.6 28.6 Twoormoreminorityraces 576 24.0 24.7 19.7 2,349 32.8 36.7 31.3 Joint 18,679 12.1 14.3 12.9 65,079 18.7 23.5 22.1 Missing 115,081 18.6 18.7 14.9 529,019 29.2 28.6 24.4 White,byethnicity1 Hispanicwhite 60,885 21.7 16.2 15.7 179,810 32.0 28.5 26.6 Non-Hispanicwhite 894,159 11.9 11.9 11.9 3,362,076 20.0 20.0 20.0 Sex Onemale 353,445 16.0 16.0 16.0 987,535 26.7 26.7 26.7 Onefemale 245,656 15.6 14.3 14.8 767,689 25.8 24.4 24.6 Twomales 13,586 17.9 17.9 17.9 31,981 24.5 24.5 24.5 Twofemales 10,332 17.6 15.3 14.5 32,124 24.0 23.5 23.7 Note:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Business-relatedloansare thoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare"notapplicable."Forexplanationof modificationfactors,seetext.Applicationsmadejointlybyamaleandfemalearenottabulatedherebecausetheywouldnotbedirectly comparablewithapplicationsmadebyoneapplicantorbytwoapplicantsofthesamesex. 1 Seetable14,note2. TheCensusBureauannuallyconductstheACS,ahouseholdsurveygatheringawidevarietyof information,includingoverallfamilyincome,homeownershipstatus,andmortgage status.Becausethesurveywasconductedonasomewhatsmallerscalepriorto2005,weuse onlyACSdatafor2005andafter,andweuseCensus2000datatomeasureborrower incomeatthebeginningof thedecade.49Foreachyearof theanalysis,wecomputeaverage familyincomeatthestatelevelforhome-purchaseborrowersintheHMDAdataandfor familiesintheACSandCensus2000datathatappeartohaverecentlypurchasedtheir homewithamortgage(thosethatreportedtheyowntheirhome,haveamortgage,and movedinthepastyear).50Wethencomputetheratioof HMDAincometoACSincome (or,fromCensus2000,censusincome),statebystateandforthreedifferentperiods:2000, 2005to2006,and2009to2010.Ratiossubstantiallygreaterthan1implywidespreadoverstatementof incomeonmortgageapplications. inordertoqualifyforahomeloan.Assuch,incomesreportedonmortgageapplicationstendtobelowerthan actualtotalhouseholdincomeintheabsenceofdeliberatelyoverstatedincome. 49 Census2000andACSmicrodatawereextractedfromStevenRuggles,J.TrentAlexander,KatieGenadek,RonaldGoeken,MatthewB.Schroeder,andMatthewSobek(2010),IntegratedPublicUseMicrodataSeries:Version5.0(machine-readabledatabase)(Minneapolis:UniversityofMinnesota). 50 WeusedataonlyformetropolitancountiesreportedintheACSandcensusmicrodata.Thisrestrictionhelps ensurecomparabilitybetweenthetwodatasourcessincetheHMDAdataprovidemuchbettercoverageof mortgageoriginationsinmetropolitanareas.Inaddition,resultsweresuppressedforstateswithfewerthan50 householdscontributingtothestatewidefigure.
TheMortgageMarketin2011 167 Table18.Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-related factors,bytypeandpurposeofloanandbyrace,ethnicity,andsexofapplicant,2011 B.Nonconventionalloanapplication Percentexceptasnoted Modifieddenialrate, Modifieddenialrate, Numberof bymodificationfactor Numberof bymodificationfactor applications Unmodified applications Unmodified actedupon denialrate Borrower- actedupon denialrate Borrower- Race,ethnicity,andsex bylender Borrower- related bylender Borrower- related related related pluslender pluslender Homepurchase Refinance Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative 7,408 16.7 18.8 18.0 4,115 35.6 37.7 32.6 Asian 35,278 18.6 17.1 15.6 14,906 32.6 33.6 32.3 BlackorAfricanAmerican 120,493 22.0 20.2 19.2 83,469 38.9 39.6 36.5 NativeHawaiianorotherPacific Islander 5,554 17.2 17.4 17.4 3,165 30.5 33.1 32.5 Twoormoreminorityraces 939 20.0 19.5 18.5 632 39.6 39.8 31.0 Joint 18,604 12.3 14.3 13.4 14,265 24.6 32.0 31.0 Missing 101,560 20.7 21.4 18.0 110,551 42.6 40.9 31.1 White,byethnicity1 Hispanicwhite 157,053 17.9 15.9 15.6 48,034 31.4 33.0 32.3 Non-Hispanicwhite 796,284 12.7 12.7 12.7 538,897 28.9 28.9 28.9 Sex Onemale 453,381 15.9 15.9 15.9 253,578 33.8 33.8 33.8 Onefemale 295,544 16.0 14.7 15.0 144,648 36.3 32.6 32.5 Twomales 18,167 20.0 20.0 20.0 6,151 30.9 30.9 30.9 Twofemales 13,935 18.9 17.1 17.8 5,598 33.5 29.3 30.1 Note:Seenotestotable18.A. Figure3suggeststhatincomeonmortgageapplicationswaswidelyoverstatedinanumber of statesin2005and2006,particularlyCalifornia,Hawaii,Massachusetts,Nevada,and NewYork.Inthesestates,averageborrowerincomeasreflectedintheHMDAdatawas 30percentormoreabovetheaverageACSborrowerincome.Incontrast,HMDAborrower incomewasnomorethan10percentaboveborrowerincomeasreportedinCensus2000in almostallstates.Finally,in2009and2010,weobserveareturntoconsistentincomes acrossdatasources,withborrowerincomesreportedinHMDAandtheACSwithin10percentof eachotherinalmosteverystate. Usersof theHMDAdatashouldbeawarethatborrowerincomewaslikelysignificantly overstatedduringthepeakof thehousingboom,particularlyinsomeareasof thecountry. Onepotentialimplicationof thisfindingisthatlendingtolower-incomeborrowers,as measuredintheHMDAdata,maybeattenuatedaroundthepeakof thehousingmarket. Transition to the 2010 Census Data and Revised Census-Tract Boundaries Censusdataareusedtoevaluatetheperformanceof lendinginstitutionsincomplyingwith theCRAandthenation’sfairlendinglaws.Forexample,familyincomedataderivedfrom thecensusareusedtocategorizecensustractsbytheirrelativemedianfamilyincome,and raceandethnicitydataareusedtocharacterizetheminoritypopulationstatusof census
168 FederalReserveBulletin|December2012 Figure3.Ratioofaverageincomeforhome-purchaseborrowers,asreportedundertheHomeMortgage DisclosureAct,toaveragehomebuyerincomefromCensus2000andtothatfromtheAmerican CommunitySurveyof2005–06and2009–10,bystate 2000 2005–06 2009–10 Note:Forinformationondatacalculation,seetext. Source:FederalFinancialInstitutionsExaminationCouncil,datareportedundertheHomeMortgageDisclosureAct;CensusBureau. tractsandothergeographies.51IntheCRAcontext,therelativeincomeof censustractsis usedtoidentifywhichcensustractsareconsideredlowerincome(lowormoderateincome) and,asaconsequence,afocusof CRAattention.Inthefairlendingenforcementcontext, census-tractminoritypopulationcharacteristicsareused,forexample,tohelpdetectpoten-
TheMortgageMarketin2011 169 tialredliningbehavior,where,forexample,alenderhasapolicyorpracticethatresultsin littleornolendinginageographicareabecauseof itsracialorethniccomposition. Usingcensussourcestoidentifyincome,population,andhousingcharacteristicsof census tractsandbroaderareashasbecomemorecomplicatedrecently.UnlikeCensus2000, whichusedasurveyquestionnairethataskedagreatmanydetailedquestions(often referredtoasthe“longform”),the2010censususedabrief questionnaire(referredtoas the“shortform”).Inparticular,the2010censusfocusedongatheringhouseholdpopulationcountsandrace,ethnicity,sex,andagecharacteristicinformation,butitprovidesrelativelylittleotherinformation—andnodataonhouseholdorfamilyincome. Inlieuof collectingextensivedetailedinformationfromeveryhouseholdonceadecadein conjunctionwiththedecennialcensus,theCensusBureaunowannuallyconductstheACS. TheACScollectsdetailedpopulation,income,andhousinginformationfromarepresentativesampleof about3millionhouseholdsusingalong-formquestionnaire.Becauseof a relativelysmallsamplesize,theannualACSdatadonotprovidesufficientinformationto establishreliableestimatesof census-tractcharacteristics.However,theCensusBureau aggregatesACSdataacrossyearsandpublishesdataforeachcensustractbasedonthe mostrecentfive-yearcombinedACSdata.Thefirstfive-yearACSaggregatedatamade availablewerederivedfromthe2005–09annualsurveysandusedthecensus-tractboundariesestablishedforCensus2000.Themorerecent2006–10combinedACSdatawere releasedtothepublicinDecember2011andareavailablefromtheFFIECatitsHMDA website.The2006–10ACSdatausethecensus-tractboundariescreatedforthe2010census. Usingfive-yearaggregateddataderivedfromtheACS,itispossibletocategorizeeachcensustractbyitsrelativemedianfamilyincome. FFIEC Treatment of Updated Census and ACS Data TheFFIEChasannouncedthat,forpurposesof preparingHMDAdisclosurereportsand forCRAperformanceevaluations,the2006–10ACSdatawillbeusedtoclassifycensus tractsbyrelativemedianfamilyincomeandthattheseclassificationswillnotbechanged foraperiodof fiveyears.52Fiveyearshence,updatedrelative-incomeinformationwillbe derivedfromthecombined2011–15ACSdata,andcensustractswillbereclassifiedaccordingtotheirupdatedincomeprofiles.Although,inprinciple,annualupdatesfromtheACS couldbeusedtoreclassifycensustractsbytheirrelativeincomeseachyear,thepotential movementof censustractsfromonerelative-incomecategorytoanotherwouldgreatly complicateCRAenforcementandmakeitdifficultforlendinginstitutionstoplanand monitortheirownactivities. Akeyaspectof theHMDAreportingrulesistherequirementthatlendersidentifythecensustractlocationsof thepropertiesinvolvedintheapplicationsandloanstheyreportoneach year.The2011HMDAdatausedcensustractsasenumeratedforCensus2000anddonot reflectanyof theupdated2010censusorACSdata.Census-tractidentifiersfortheforthcoming2012HMDAdatawillbethoseenumeratedforthe2010census:Analysisof these datawillusethe2010censusdataandthe2006–10ACSdata. 51 Relativeincomeistheratioofthecensus-tractmedianfamilyincometothemedianfamilyincomeofthe broaderarea(eithertheMSAorthenonmetropolitanportionofthestate)wherethecensustractislocated. 52 Foradiscussionoftheshifttothe2006–10ACSdataforcensus-tractrelative-incomeclassification,seeFederal FinancialInstitutionsExaminationCouncil(2011),“FFIECAnnouncestheUseofAmericanCommunitySurveyDatainItsCensusDataFiles,”pressrelease,October19,www.ffiec.gov/press/pr101911_ACS.htm.The classificationmaychangeiftheOfficeofManagementandBudget(OMB)establishesnewMSAsoraltersthe boundariesofexistingMSAs.TheOMBisscheduledtoreleasenewMSAdelineationsin2013.
170 FederalReserveBulletin|December2012 Thereweresubstantialchangesinthenumberandboundariesof censustractsbetweenthe 2000and2010censuses.Asaconsequenceof populationgrowthandmigration,aswellas otherfactors,suchasnewroadconstruction,the2010censusincludesmanymorecensus tractsthanCensus2000,andthegeographicareasof manycensustractsusedfor Census2000havebeenaltered.Overall,Census2000includedabout66,300censustracts; the2010censusincludesabout74,000censustracts.About46percentof the2010census tractshavethesamegeographicboundariesasin2000,andabout72percenthavealand areathatis95percentormoreidenticaltotheareain2000.Forpurposesof thisarticle,the censustractsthathave2010areasthatare95percentormorethesameasin2000are referredtoas“substantiallysimilar”censustracts. Theshiftfromthe2000tothe2010censushasimportantimplicationsforthoseusingthe HMDAdata.Perhapsmostimportantisthepossibilitythataloanrelatedtoagivenpropertymayhavebeenidentifiedasbeinginacensustractinaparticularrelative-income grouponeyear,butaloanonthatsamepropertymaybereclassifiedintoadifferentrelativeincomecategorythenextyearsimplybecauseof theshiftfromtheincomedatabasedon Census2000totheincomedatabasedonthe2006–10ACS.Reclassificationcouldoccur becausetheincomeprofileof thepopulationinthecensustracthaschanged(alteringthe numeratorintherelative-incomecalculation),becausetheincomeprofileof thebroader areahaschanged(alteringthedenominatorintherelative-incomeclassification),orboth. Evaluating the Effects of Census Data Changes Inordertogaugethepotentialeffectsof censusdatachangesontheclassificationof lendingactivity,weundertooksomesimulationsusingthe2011HMDAdata.Theanalysishere focusesonthereclassificationof censustractsduetochangesintheirrelativefamily incomesandthereclassificationof homelending(of alltypes)duetothereclassificationof thecensustractswherethepropertiesassociatedwiththeloansarelocated.Becausethe locationof branchofficesmayinfluenceaninstitution’shome-lendingactivityandbecause branchlocationsareanimportantcomponentof CRAperformanceevaluations,wealso assesstheeffectsof thecensusdatachangesonbranchofficeclassificationbycensus-tract income.Unlikelending,whereaninstitutioncanpotentiallyalterthegeographicpatternof thehomeloanapplicationsitreceivesbychangesinmarketing,outreachtorealestate agentsandhomebuilders,andothertechniques,branchofficelocationscannotbereadily changed. Weevaluatethe“pure”effectsof updatedpopulationincomeestimatesbycomparingcensustractincomeclassificationsusingCensus2000datawithclassificationsderivedfromthe 2005–09ACSsurveys.BothCensus2000andthe2005–09ACSusethesamecensus-tract boundaries.Also,toensurethatchangesinMSAboundariesoverthecourseof thepast decadedonotaffecttheanalysis,weusethecensus-tractrelative-incomeclassificationsas carriedonthe2011FFIECHMDAdatafiles.Thesefilesreflectthe2000decennialestimatesof medianfamilyincomeforeachcensustractbutusecurrentMSAboundarydefinitions.Thus,theonlyfactorsthatcanaffectourestimatesof incomereclassificationsare theupdatestocensus-tractorbroaderareamedianfamilyincomesthatcomeabout becauseof changesinfamilyincomeestimatesfromshiftingfromCensus2000tothemore recentdatabasedonthe2005–09ACS.53 53 Usingthe2005–09ACSincomedatainthisexerciseisnotidealsincetheactualincomeestimatesusedforCRA andHMDApurposeswillbeobtainedfromthe2006–10ACSdata.Toaddressthepossibilitythatthe2005–09 ACSincomedataandthe2006–10ACSincomedataforindividualcensustractsdiffersignificantly,andconsequentlyaffectreclassificationestimates,weconductedasecondanalysisthatislimitedtothesubsetofcensus tractsthathavesubstantiallysimilarboundariesasdefinedforthe2000and2010censuses.Resultsareinthe finalsixcolumnsoftable19.Asshowninthetable,thepatternsareverysimilarwhethertheanalysisisdone
TheMortgageMarketin2011 171 Table19.Effectofthetransitiontoupdatedcensusdataonclassificationofcensustracts,home lending,andbranchoffices,bycensus-tractrelative-incomereclassification Census2000to2005–09ACS Census2000to2006–10ACS Census-tract relative-income Censustracts Loans Branchoffices Censustracts Loans Branchoffices reclassification1 Number Percent Number Percent Number Percent Number Percent Number Percent Number Percent Lowtolow 2,888 74 40,675 64 1,966 63 2,213 76 31,483 64 1,486 68 Lowtomoderate 860 22 16,682 26 718 23 624 21 13,270 27 478 22 Lowtomiddle 110 3 2,910 5 157 5 58 2 2,441 5 118 5 Lowtohigh 44 1 2,856 5 260 8 21 1 1,930 4 107 5 Memo:Total 3,902 100 63,123 100 3,101 100 2,916 100 49,124 100 2,189 100 Moderatetolow 2,323 16 56,946 9 2,078 13 1,955 18 47,304 10 1,622 14 Moderateto moderate 9,208 65 410,331 65 10,624 66 7,060 65 301,313 65 7,912 67 Moderateto middle 2,411 17 151,120 24 3,171 20 1,813 17 104,672 23 2,139 18 Moderatetohigh 153 1 11,099 2 268 2 100 1 8,766 2 155 1 Memo:Total 14,095 100 629,496 100 16,141 100 10,928 100 462,055 100 11,828 100 Middletolow 108 0 2,430 0 159 0 80 0 1,795 0 113 0 Middleto moderate 4,777 15 314,565 9 6,993 14 3,784 16 237,760 11 4,967 14 Middletomiddle 23,710 74 2,590,180 76 37,884 75 17,496 73 1,696,802 75 25,712 75 Middletohigh 3,359 11 500,753 15 5,360 11 2,577 11 313,465 14 3,588 10 Memo:Total 31,954 100 3,407,928 100 50,396 100 23,937 100 2,249,822 100 34,380 100 Hightolow 8 0 64 0 21 0 0 0 0 0 0 0 Hightomoderate 36 0 1,342 0 71 0 23 0 1,042 0 47 0 Hightomiddle 2,664 18 380,064 13 4,516 16 2,076 19 253,190 14 3,052 17 Hightohigh 11,907 81 2,515,553 87 22,791 83 8,750 81 1,530,101 86 14,399 82 Memo:Total 14,615 100 2,897,023 100 27,399 100 10,849 100 1,784,333 100 17,498 100 Note:Foranexplanationofthetransitiontoupdatedcensusdata,seethetextdiscussion“Transitiontothe2010CensusDataandRevised Census-TractBoundaries.”Censustractsareasdefinedinthedecennialcensusesfor2000(Census2000)and2010. 1 Fordefinitionsofcensus-tractincomecategories,seetable14,note4. ACSAmericanCommunitySurvey. Source:Forcensus-tractlocationsofpropertiesrelatedtohomeloans,FederalFinancialInstitutionsExaminationCouncil,datareportedunder theHomeMortgageDisclosureAct;forbranchofficelocations,dataderivedfromtheSummaryofDepositsasofJune30,2011. Census-Tract Reclassification OuranalysisindicatesthatthetransitionfromtheCensus2000tothe2005–09ACSdata forclassifyingcensustractsbyrelativeincomewouldresultinsignificantchangesincensustractincomecategoryclassification.Forexample,17percentof thecensustractsthatwere classifiedasmoderateincomeusingthe2000incomedatawouldbereclassifiedasmiddle income,and1percentwouldbereclassifiedashigherincome(table19).Becausethesecensustractswouldnolongerbeclassifiedasfallinginthelower-incomecategory,lendingand otheractivities,includingbranchofficelocations,inthesecensustractswouldnolongerbe afocusof CRAattention.However,about15percentof middle-incomecensustracts wouldbereclassifiedasmoderateincome,andactivitiesinthesecensustractswouldgain emphasisinCRAperformanceevaluations. usingthe2005–09ACSdataandthe2000census-tractboundariesorthe2006–10ACSdatausingonlythesubstantiallysimilarcensustracts.
172 FederalReserveBulletin|December2012 Loan Reclassification Resultsaresimilarwhentheanalysisconsidersreclassificationof homeloansinsteadof censustracts,butsomeof thetransitionsaremorepronounced.Ananalysisusingthe Census2000andthe2005–09ACSdataindicatesthatabout24percentof thehomeloans extendedin2011andclassifiedasfallinginmoderate-incomecensustractswouldtransitionandbereclassifiedasfallinginamiddle-incomecensustractandthat2percentof the loanswouldtransitiontoahigher-incomecensustract.Atthesametime,about9percent of theloansfallinginmiddle-incomeareaswouldbereclassifiedasfallinginmoderateincomeareas.However,intermsof theabsolutenumberof loans,hadthenewcensus-tract relative-incomeclassificationsbeenusedin2011,therewouldhavebeenanetincreasein mortgagelendingtolow-andmoderate-incomeneighborhoodsof about150,000loans, about22percenthigherthanthenumberof LMIloansin2011undercurrentcensus-tract relative-incomeclassifications(dataderivedfromtable19). Branch Office Reclassification Forouranalysisof theeffectsof thetransitionfromtheCensus2000totheACS-based dataontheclassificationof branchofficesbycensus-tractrelativeincome,weusethelocationof branchofficesasreportedintheSummaryof Deposits(SOD)asof June30,2011. TheSODisanannualsurvey,compiledbytheFederalDepositInsuranceCorporation (FDIC),of branchofficedepositsforallFDIC-insuredbankinginstitutions.54Thedata includethelocation(state,county,andcensustract)of eachbranch(andheadquarters) officeandthedollaramountof depositsthatareallocatedtothatbranchbythebanking institution.Forthisexercise,weexcludedthelocationsof automatedtellermachines (ATMs).AlthoughATMsareconsideredinCRAperformanceevaluationsunderthe“servicestest,”itseemsunlikelythatATMlocationshavemuchinfluenceonhome-lending activity,themainfocusof thisarticle.55Intotal,thebranchofficeanalysisincludedabout 98,000branchoffices. Asintheanalysisof censustractsandhomelendingdescribedearlier,ouranalysisof branchofficereclassificationindicatesthattheswitchfromCensus2000datatothemore recentACS-basedincomedatawouldhaveanotableeffectontheclassificationof branch officesbycensus-tractrelativeincome.Forexample,20percentof thebranchofficesthat wereclassifiedaslocatedinamoderate-incomecensustractusingthe2000incomedata wouldbereclassifiedasmiddleincome,and2percentwouldbereclassifiedashigher income,usingthe2005–09ACSdata.Becausethesebranchofficeswouldnolongerbeclassifiedaslocatedinlower-incomecensustracts,theywouldnolongerbeafocusof CRA attention.However,about14percentof branchesclassifiedasbeinglocatedinmiddleincomecensustractsbasedonCensus2000datawouldbereclassifiedasbeinglocatedin moderate-incomecensustracts,andconsequently,theseofficeswouldgainemphasisin CRAperformanceevaluations.Becausetherearemorebranchofficesinmiddle-income censustractsthaninlow-ormoderate-incomecensustracts,thetransitiontotheupdated censusinformationwillresultinanetincreaseof about3,400branchofficesinareasthat arethefocusof CRAattention. 54 SeeFederalDepositInsuranceCorporation,“SummaryofDeposits,”webpage,www2.fdic.gov/sod. 55 CRAcomplianceevaluationsfocusonthreeaspectsofperformance:lending,services,andinvestment.For moreinformation,seeFederalFinancialInstitutionsExaminationCouncil,“CRARatingSearchFrequently AskedQuestions,”webpage,www.ffiec.gov/craratings/ratings_faq.htm.
TheMortgageMarketin2011 173 Appendix A: Requirements of Regulation C TheFederalReserveBoard’sRegulationCrequireslenderstoreportthefollowinginformationonhome-purchaseandhome-improvementloansandonrefinancings: For each application or loan ‰ applicationdateandthedateanactionwastakenontheapplication ‰ actiontakenontheapplication — approvedandoriginated — approvedbutnotacceptedbytheapplicant — denied(withthereasonsfordenial—voluntaryforsomelenders) — withdrawnbytheapplicant — fileclosedforincompleteness ‰ preapprovalprogramstatus(forhome-purchaseloansonly) — preapprovalrequestdeniedbyfinancialinstitution — preapprovalrequestapprovedbutnotacceptedbyindividual ‰ loanamount ‰ loantype — conventional — insuredbytheFederalHousingAdministration — guaranteedbytheDepartmentof VeteransAffairs — backedbytheFarmServiceAgencyorRuralHousingService ‰ lienstatus — firstlien — juniorlien — unsecured ‰ loanpurpose — homepurchase — refinance — homeimprovement ‰ typeof purchaser(if thelendersubsequentlysoldtheloanduringtheyear) — FannieMae — GinnieMae — FreddieMac — FarmerMac — privatesecuritization — commercialbank,savingsbank,orsavingsassociation — lifeinsurancecompany,creditunion,mortgagebank,orfinancecompany — affiliateinstitution — othertypeof purchaser For each applicant or co-applicant ‰ race ‰ ethnicity ‰ sex ‰ incomereliedonincreditdecision
174 FederalReserveBulletin|December2012 For each property ‰ location,bystate,county,metropolitanstatisticalarea,andcensustract ‰ typeof structure — one-tofour-familydwelling — manufacturedhome — multifamilyproperty(dwellingwithfiveormoreunits) ‰ occupancystatus(owneroccupied,non-owneroccupied,ornotapplicable) For loans subject to price reporting ‰ spreadabovecomparableTreasurysecurityforapplicationstakenpriortoOctober1,2010 ‰ spreadaboveaverageprimeofferrateforapplicationstakenonorafterOctober1,2010 For loans subject to the Home Ownership and Equity Protection Act ‰ indicatorof whetherloanissubjecttotheHomeOwnershipandEquityProtectionAct
175 Federal Reserve BULLETIN December 2012 Vol. 98, No. 9 Consumers and Debt Protection Products: Results of a New Consumer Survey ThomasA.Durkin(nowretired)andGregoryElliehausen,of theBoard’sDivisionof ResearchandStatistics,preparedthisarticle. Debtprotectionproductshelpconsumerspayoff adebtorcontinueorsuspendpayments upontheoccurrenceof unfortunateandunpredictableeventslikedeath,disability,and involuntaryunemployment.Thecreditinsuranceversionisalmostasoldasfamiliarconsumercredititself,buttherealsoarenewerformsof debtprotectioncalleddebtcancellationanddebtsuspensionagreementsthatwillbereferredtoheresimplyascreditprotectionproducts.Evidenceshowsthatmanyconsumerspurchasedebtprotectionwhenthey enterintovariouskindsof creditarrangements. Creditlifeinsuranceisaformof termlifeinsurancethataccompaniescreditobligations andrepaysthedebtif deathoccurs.Creditdisabilityinsurance(oftenreferredtoascredit accidentandhealth,orcreditA&H,insurance)isaformof accidentandhealthinsurance, whileinvoluntaryunemploymentinsurance(IUI)iscasualtyinsurancethatalsocanaccompanycreditarrangements.Inthecaseof eitherdisabilityinsuranceorIUI,theinsurance companymakesthepaymentsduringdisabilityorinvoluntaryunemploymentuptosome maximumbenefitperiod. Asindicated,someotherdebtprotectionproductslikedebtcancellationcontractsanddebt suspensionagreementsarenewer.Todifferentiatetheirseparatelegalstatusfromcredit insurance,theyareoftengenericallyreferredtoascreditprotectionproducts.Likecredit insurance,theyprovidetoconsumerswhopurchasethemeithercancellationof thedebtor therighttosuspendordeferpaymenttothelenderforatimeif coveredeventsoccur. Theselatterproductsareanagreementbetweentheconsumerandthelenderanddonot involvethesaleof insurancetoaconsumerbyathird-partyinsurer.Despitethisdifference, fromtheconsumer’sstandpointcreditinsuranceandcreditprotectionproductsworkbasicallythesameway.Bothkindsof protectiontypicallyareofferedatthepointof saleof a lendingarrangement(orsometimesafterward),andtheyprovidethesametypesof benefits.Debtcancellationandsuspensionagreementsarethemostcommononopen-end creditcardplansofferedbybanks. Despiteavailabilityof debtprotectionintheformof creditinsurancefordecades,therestill hasnotbeenagreatdealof consumerresearchontheseproducts.Inparticular,consumers’ experienceswithandattitudestowardcreditinsurancehavebeendocumentedonlyinfrequentlyoveralongperiodof time.1Thisarticlereexaminesconsumerexperiencewiththese productsbyreportingonnewconsumersurveyresults. Note:TheauthorsthanktheConsumerCreditIndustryAssociationformakingthedataavailableforanalysis. 1 Thesurveyresultsarefoundinthefollowingsources:CharlesL.Hubbard,ed.(1973),ConsumerCreditLifeandDisabilityInsurance(Athens,Ohio:OhioUniversity);JoelHuber(1976),ConsumerPerceptionsofCreditInsuranceon RetailPurchases(WestLafayette,Ind.:PurdueUniversity);ThomasA.DurkinandGregoryE.Elliehausen(1978), 1977ConsumerCreditSurvey(Washington:BoardofGovernorsoftheFederalReserveSystem);AnthonyW.Cyrnak andGlennB.Canner(1986),“ConsumerExperienceswithCreditInsurance:SomeNewEvidence,”FederalReserve
176 FederalReserveBulletin|December2012 Thenextsectionof thisarticledescribestheseproductsmorefullyandaddresseswhythey havesometimesbeenviewedascontroversial.Thefollowingsectionprovidesbackground forthesurveyapproachtostudyingtheseproducts,andthenextexaminesresultsof anew nationwidesurveyof consumersconductedinearly2012.Thefinalsectionprovidesabrief summaryandconclusion. Debt Protection Products Althoughsomedebtprotectionproductsarenot,bylegalstandards,insurance,consumers seesuchprotection,includingbothcreditinsuranceandotherproducts,asfunctionally similartoordinarykindsof termlifeanddisabilityinsurance.Theoriginof debtprotectionproductsisintheanxietysometimesfeltthatdeath,disability,oranotherunfortunate lifeeventcouldcauseanearner’sfamilytohavedifficultyrepayingdebtsormaintaining payments.Becausetheseproducts’originsareinthelendingarena,subsequentregulation hasrequiredthatthebasicnatureof theinsurancecoverageisdefinedbythetermsof theassociatedcreditcontract.Thisrequirementhasmaintainedandfosteredsomecontinuingdifferencesbetweendebtprotectionsandordinaryinsuranceandhasaffectedthespecificsof relatedregulation. Onedifferencebetweendebtprotectionandordinaryinsuranceisthatthefaceamountof thedebtprotectioninforceisnotconstantfordebt-relatedproducts;rather,itdeclinesover thelifeof thedebtasthecreditisrepaid(orfluctuatesinthecaseof creditcardcredit).In contrast,mostordinaryterminsuranceissoldinfixedamountsandremainsataconstant faceamountforthespecifiedperiodof time. Aseconddifferencearisesfromtheheritageof debtprotectionintheautomobilecredit, furniture,appliance,andsmallcashloanindustriesratherthaninthetraditionalinsurance industry:thesmallsizeof typicaldebtprotectioncontracts.Smallsizedcreditcontractsand relateddebtprotectionhavecausedtherevenuestreamsfromtheprotectionproductstobe smallaswell,leadingtohighlysimplifiedunderwriting,marketing,andpaperwork procedures. Inparticular,debtprotectionproductsdevelopedwithoutadifferentiatingsetof actuarially variablecharacteristicsforpricing,suchassex,age,health,orsmokinghabits.Furthermore,theywereandarestillsoldparttimebylendingofficersandpersonnelintheprocess of bookingandservicingconsumercredittransactions.Becauseof accountsizes,providers of debtprotectionhavebeenbothunwillingandunabletoinvestthesumsnecessaryto haveitcarefullyunderwrittenconsumerbyconsumeror,inthecaseof creditinsurance, soldbyindependentorordinary-licensed,full-timeinsuranceagents. Forcreditinsurance,thelender’spersonnelfunctionasthesalesagentsfortheinsurer(with necessarystatelicensureif required).Fordebtcancellationorsuspension,loanofficersprovidethecreditprotectionproductsapprovedbytheirownlendinginstitution.Becauseof theshorttermandgenerallysmallcashflows,lendingofficersnormallyhaveaskedcustomersonlyonebasicquestion:whethertheywanttheprotectioncoverageornot.If custom- BankofSanFranciscoEconomicReview,(Summer),no.3,pp.5–20;JohnM.BarronandMichaelE.Staten (1996),InnovationsinFinancialMarketsandInstitutions,vol.10:ConsumerAttitudestowardCreditInsurance (Norwell,Mass.:KluwerAcademicPublishers);andThomasA.Durkin(2002),“ConsumersandCreditDisclosures:CreditCardsandCreditInsurance,”FederalReserveBulletin,vol.88,pp.201–13,www.federalreserve .gov/pubs/bulletin/2002/0402lead.pdf.SeealsoRobertA.EisenbeisandPaulR.Schweitzer(1979),Tie-Ins betweentheGrantingofCreditandSalesofInsurancebyBankHoldingCompaniesandOtherLenders,Staff Study101(Washington:BoardofGovernorsoftheFederalReserveSystem,February),whichdiscussessurvey results.
ConsumersandDebtProtectionProducts 177 ersdowantprotectioncoverage,theremaybeasecondaryquestiontodetermineeligibility—forexample,customerage.Insomecases,therealsomightbearecommendationthat theprotectionisagoodidea. Asnoted,theretypicallyhasbeennopricingdifferentiationaccordingtosex,ageoractuarialmortality,orhealthcharacteristicsof thecustomerpopulation,exceptthatcredit lifeinsurancecoveragegenerallyhasbeenunavailableforthoseoverage65(or,insome states,overage70).Thislackof pricingdifferentiationmeans,of course,thatdebtprotectionproductsarerelativelymoreattractiveformales,olderconsumers,thoseinpoorer health,andthoseadoptingcertainlifestylechoices(smoking,forexample).Theresulting adverseselectionagainsttheinsurerorlender,togetherwiththesmallsizeof theprotection contracts,hasledtotheargumentforsalessimplificationinordertoreduceproduction costsperdollarof protection. Althoughgenerallyrequiredbysubsequentregulationtobeavailabletoanydebtormeeting theagerequirements,thesimplifiedmarketingof debtprotectionproductsthroughlending personnelratherthanthroughexperiencedagentshasbeenattimescontroversial.Partof thecontentionhasbeenthatintheabsenceof anyattempttoexplorecustomers’insurance portfolioneedsandtheirspecialriskcharacteristics,potentialpurchasersreceivenoprofessionalaidinthepurchasedecision.Someobservershavemaintainedthatthemarketing issosimplifiedthattheproductsandtheirpricingarenotevenadequatelyexplained.Asa consequence,theycontend,someconsumersdonotconsiderimplicationsof thepurchase adequatelyorsometimesevenunderstandatallwhattheypurchasedorhowitworks. Further,forcreditinsurance,inanefforttosaveonpaperworkandrecordkeepingand reducetheneedformonthlypaymentstoboththecreditorandtheinsurer,therelatively smallpremiumamountsfrequentlyhavebeencollectedinasinglepremiumattheoutset andfinancedintheloanbalance.Inadditiontoreducingprocessingexpenses,this approachhastheadvantagethattheprotectionneverlapses,evenif theconsumerbecomes delinquentinmakingpaymentsontheunderlyingcreditobligation.Nonetheless,criticism of thesinglepremiumapproachandfinancingitintheloanhasleddirectlytomore widespreadprevalenceinrecentyearsof protectionwithamonthlyfeeinsteadof asingle premium.Thisapproachhasbecomeknownasmonthlyoutstandingbalanceprotection (frequentlyabbreviatedasMOBinsuranceorprotection).Feesfordebtcancellationagreementsandsuspensionagreementsalsoarecollectedmonthly. Asoutlined,controversyovercreditinsuranceandcreditprotectionproductsarisesnotso muchfromtheusefulnessof theproductsfortheprotectionof assets,creditstanding,and generalfinancialwellbeinginthecaseof personaldisasters,asfromthemethodsusedin thedistributionof debtprotection.Criticshavearguedthatthedistributionmethodthat takesplaceatthecreditpointof saleprovidesboththeincentiveandtheopportunity forlendingpersonneltomisleadconsumersabouttheusefulnessof theinsuranceorother productsandevencoercethemintopurchasingtheseproducts.2 Incontrast,productsupportershavearguedthatthesmallsizeof thedebtprotectionand thelimitedcashflowarisingfromsmallcreditinsuranceandcreditprotectionproducts 2 ThatsuchopportunitiesexistisevidencedbyarecentenforcementactionagainstCapitalOne.InJuly2012, CapitalOnesettledanenforcementactionbroughtbytheConsumerFinancialProtectionBoard(CFPB) involvingthemarketingofcreditprotectionandotherancillaryproductsbyathird-partyvendor.TheCFPB chargedthatthevendorsdidnotalwaysinformcreditcardholdersthattheproductswereoptional,didnot alwaysprovideadequateinformationonthecostandtermsoftheproduct,andmisledconsumersthatthe productwouldimprovetheircreditscoreorincreasetheircreditlimits.SeeAdministrativeProceedingFileNo. 2012-CFPB-0001(2012),http://files.consumerfinance.gov/f/201209_cfpb_0001_001_Consent_Order_and_ Stipulation.pdf.
178 FederalReserveBulletin|December2012 havenotallowedeitherextensivecarefulunderwritingorreviewof aconsumer’sfullinsuranceandprotectionneedsbytrainedinsuranceunderwritersorfinancialplanners.Rather, intheirview,averyusefulone-size-fits-allproductlinehasevolvedwithnoorfewunderwritingdifferentiations,inordertoreducecosts.Soastoavoid“cherrypicking”orother possibleunfairformsof discriminationforthislimitedsetof offerings,lawandregulation inthisareahavealsoevolvedtotheone-size-fits-allapproachandnowgenerallypermit onlyverylimiteddifferentiationamongcustomers(suchasanoverallagelimitlike65or 70).Underthesecircumstances,saleseffortandreviewatthepointof saleisgoingtobe shortandconsumersaregoingtohavetodecideforthemselveswhattheiroverallinsurance andfinancialplanningneedsare. Creditinsurancehaslongbeensubjecttoregulationthatvariesbystatebutgenerally includesstateapprovalof premiumratescharged,policyforms,disclosures,thesolvencyof theinsurancecompanies,andthesalesapproachesof producers.Newerdebtcancellation andsuspensionproductshavebeenjudgedbyfederalbankingregulatorsandbycourtsas legallyapartof lendingandnotaformof insurance.Theyareofferedbynationaland statebanksasbankingproductsundertheNationalBankActandstatebankingparity lawsandarenotregulatedasinsuranceunderstateinsurancelaws.Instead,theyaregovernedbyrulesof nationalandstatebankregulatoryagencies,inparticularrulesof the Officeof theComptrollerof theCurrency(OCC),andareenforcedbytheOCCandother bankregulators.Despitethelegaldifferences,itiscommoninpublicpolicydiscussionsof consumerprotectiontoexaminecreditinsuranceandotherdebtprotectionproducts together.Althoughcreditinsuranceisaninsuranceproductandotherformsof debtprotectionareconsideredbankingproducts,fromtheconsumer’sstandpointtheyprovidethe samekindsof benefitsandareclosesubstitutes. Bothcreditinsuranceandotherformsof debtprotectionarealsosubjecttothefederal TruthinLendingAct(TILA).Theconcernthatlenderscouldmisleadandmisdirectconsumersatthepointof saleof creditaccountsledtoaspecialprovisioninthelawatitspassagein1968.Asectionof TILAexcludesthechargefordebtprotectionproductsfromthe financechargeif thereisaseparatedisclosureof thevoluntarynatureof thepurchase beforethechargeoccurs(see12CFR226.4(d)).Thisprovisionmakesthevoluntarynature of thepurchasedecisionakeyissueforconsumerresearch. Survey Background Overthepastfewdecades,theinterestof researchersinconsumers’reactionstotheseproductshascausedthemtoundertakeanumberof interviewstudiestoexploreconsumer experiencesof purchasingdebtprotectionproducts,especiallythesalespressureconcern. Paststudieshavefocusedoncreditinsurance,theolderformof debtprotection.Theworkinghypothesisof sucheffortshasbeentwo-pronged.First,theremaybeinstanceswhere choiceislimitedbysomeabusivelenders.However,if theproportionof accountswith creditinsuranceordebtprotection(the“penetrationrate”)iswellshortof universal,thenit isdifficulttoconcludethatconsumershavenochoiceinthematterortoargueforchanges tomaketruechoicemorewidespread.Second,if consumersexpressfavorableattitudes towardtheprotectionproductsinquestion,thenitislikewisedifficulttoconcludethat thereiswidespreadabusivepressureorrequirementstopurchaseproductstheyconsider notuseful. Twobasickindsof surveyapproachesmightbeundertakentoexploretheseissues.The firstisthegeographicareaapproach—forexample,astatewideornationwiderepresentation.Thisapproachhasanadvantageinthatresultsreflecttherelevantgeographicareaas awhole,butitpresentsachallengeinthatitisnotaveryefficientwaytoobtainfeedback
ConsumersandDebtProtectionProducts 179 aboutarelativelyuncommonevent.Suchanapproachcanrevealstatewideornationwide penetrationof debtprotectionpurchasesoncreditaccounts,forinstance,butittakesasizablenumberof expensivescreeninginterviewstodosoasnoteveryoneisacredituserand thosewhoaremaynotbeapurchaserof debtprotection. Thesecondapproachisobtaininginterviewsunderasampledesignthatismorelimitedin scope—forexample,customersof asinglesupplieroragroupof suppliers.Companiesuse thisapproachfrequentlywhentheysurveytheirowncustomersformarketingpurposes andtomeasurecustomersatisfaction.Thedifficulty,of course,isthatthisapproachpreventsinterviewsbeyondtheconfinesof thesourcelistemployed.Acompanysurveyingits owncustomerbase,forinstance,learnslittleornothingaboutthecustomersof othercompanies.Certainlyitisimpossibletomeasuresuchthingsasthenationwidesalespenetration ratewiththisapproach. Inthepast,theFederalReservehasreportedresultsof nationallyrepresentativesamplesof interviewswithusersof creditinsuranceundertakenaspartof itsprogramof interviewing consumersfromtimetotimeonavarietyof financialmatters.Surveysusingsimilarquestionnairesandthesameinterviewingorganizationtookplacein1977,1985,and2001.3 Thisarticlecontinuesalongthelinesof FederalReserveresearch,usingasurveyfromearly 2012withsimilarinterviewsandundertakenbythesamesurveyorganization.Thenewsurveyusesmanyof thesamequestionsemployedinthelate2001interviewsreportedinthe FederalReserveBulletininApril2002.4Thedifferentiatingfactorof the2012surveyisthat therewasanattempttomakesurethatdebtprotectionproductsthatwerenotinsurance werealsoincluded.Therealsowereafewadditionalquestionsin2012andafewquestions omittedfromthe2001questionnaire.Actualinterviewingwasconductedallfourtimesby theSurveyResearchCenter(SRC)of theUniversityof Michigan. New Survey InJanuaryandMarch2012,theSRCconductedatotalof 1,006interviewsaboutconsumers’experienceswithcreditinsuranceandotherdebtprotectionproducts.TheSRC’s researchapproachproducedanationwideprobabilitysampleof respondentsthatisrepresentativeof thecontiguous48stateswithinstatisticalconfidencelimits.TheSRCcodedthe interviewresultsandprovidedamachine-readabledatasetinSASformat.Theauthors wrotethenecessarySAScomputerprogramtoproducethetablesreportedhere. Theinitialresearchquestiondealtwiththetrendinpenetrationratesovertime,wherethe term“penetration”referstotheproportionof consumersusingatypeof creditwhosimultaneouslypurchasedebtprotectionproductsof onekindoranother.Foranalyticalpurposes,acredituserwhoindicatedpurchasingeitherthelifeordisabilityformof either creditinsuranceortherelatedbanking-productcancellationorsuspensionformsof protectionwerecountedaspurchasers.Bycountingtheseindividualsandformingaratioof purchaserstototalcreditusers,itwaspossibletoexaminerecentpenetrationratesforvarious kindsof credit. Thepenetrationrateonclosed-endconsumerinstallmentcreditwas22percentinearly 2012,aboutthesameasin2001(table1).Theratebothyearswassubstantiallybelowthe correspondingratesof 64and65percentfoundin1977and1985,respectively,withsimilar 3 SeeDurkinandElliehausen(1978),CyrnakandCanner(1986),andDurkin(2002)innote1. 4 SeeDurkin(2002)innote1.
180 FederalReserveBulletin|December2012 Table1.Debtprotectionpenetrationrates,1977–2012 Percentagedistributionswithingroupsofcreditusers Installmentcredit Mortgagecredit Creditcard Debtprotection status 1977 1985 2001 2012 2001 2012 2001 2012 Have 63.9 64.7 22.7 22.0 32.1 23.9 20.1 14.0 Donothave 30.1 33.1 74.4 75.6 60.5 72.3 73.9 82.0 Donot know/refuse 6.0 2.2 2.9 2.4 7.4 3.8 6.0 4.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note:Hereandinsubsequenttables,columnsmaynotsumtototalsbecauseofrounding. Source:Forsourceinformationhereandinsubsequenttables,seetextnote1. researchapproaches.Thisdeclineissubstantialandsuggeststhatif widespreadaggressive salesarebeingattempted,theyarenotverysuccessful. Thepenetrationrateonmortgagecreditappearedtobeinthesamegeneralrangeason closed-endconsumerinstallmentcredit,especiallyin2012.(Mortgagecreditandcreditcard penetrationwerenotmeasuredinthe1977or1985surveys.)Bothyears,penetrationrates oncreditcardswerealittlelowerthanonclosed-endinstallmentcredit.Thepenetration ratesoncreditcardsweresomewhathigherthanthosemeasuredbytheGovernment AccountabilityOffice(GAO)in2011.TheGAOmeasuredpenetrationamongcard accounts,ascertainedfromthefilesof cardissuers.Theconsumersurveyapproachshould normallybeexpectedtoproduceahigherpenetrationmeasurement,asconsumersmight havemorethanoneaccountandnotallaccountsmighthaveassociateddebtprotection.If consumershavemorethanoneaccounttheyarecountedasa“yes”if anyof theircard accountshavedebtprotection,aswasthecasewiththissurvey,thentheratemeasured acrossconsumerswouldbehigherthantheratemeasuredacrossaccounts.5 Tolookatthesalespressureissue,thefirstapproachwastoquestionrespondentsdirectly abouttheirexperienceatthepointof sale.Respondentswithcommonclosed-endconsumercreditoutstandingwereaskedaboutthedebtprotectionofferingatthepointof sale andwhetherornottheyhadpurchasedanyprotectionproducts.Itappearsthatexperience haschangedsharplysince1977. In1977,themajority(72percent)of closed-endconsumercredituserswhohadpurchased debtprotectionsaidthatthecreditorhadeitherrecommendedthepurchaseorrecommendeditstrongly(table2).Thisproportionfellto36percentin1985andto29percentin 2001,beforerisingabitto38percentin2012.Itisworthnotingagainthatthepenetration ratewasalsomuchlowerinthelattertwoyears.Thisdecreaseinthepenetrationratemeans thatamongclosed-endinstallmentcreditusers,theproportionwhobothpurchasedand whonotedreceivingarecommendationtothateffectfellsharplyafter1977duetoboth lowerpenetrationratesandfewerexperiencesof arecommendation.In1977,about46percentof closed-endinstallmentcreditusersreportedthattheypurchasedandreceivedapurchaserecommendationfromthecreditorof varyingintensity(thatis,the72.4percentwho saidthatdebtprotectionwas“recommended”or“stronglyrecommended/required” (table2)of the63.9percentwhopurchased(table1)).Thesepercentagescomparetoonly about8percentin2012(37.7percentof purchaserswhosaidthatdebtprotectionwas“rec- 5 SeeGovernmentAccountabilityOffice(2011),CreditCards:ConsumerCostsforDebtProtectionProductsCan BeSubstantialRelativetoBenefitsbutAreNotaFocusofRegulatoryOversight(Washington:GAO,March).In thisreport,theGAOestimatedthepenetrationrateamongbanktypecreditcardaccounts(notamongconsumers)atabout7percent.
ConsumersandDebtProtectionProducts 181 Table2.Recommendationsconcerningdebtprotectionpurchaseatpointofsaleoninstallmentcredit, 1977–2012 Percentagedistributionswithingroupsofusersofinstallmentcredit,withandwithoutdebtprotection Debtprotection Recommendation 1977 1985 2001 2012 With Without With Without With Without With Without Nevermentioned 10.6 52.2 14.8 45.2 15.4 53.3 18.7 62.7 Offered 15.0 22.6 44.7 35.5 53.2 33.9 43.5 29.5 Recommended 33.1 17.0 16.4 12.9 12.2 4.1 17.6 0.5 Strongly recommended/required 39.3 2.3 20.1 2.6 16.6 3.4 20.1 0.9 Donotknow/refuse 2.1 5.9 3.9 3.9 2.6 5.3 * 6.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 *Lessthan½of1percent. ommended”or“stronglyrecommended/required”(table2)of the22percentwhopurchased(table1)).After1977,theproportionof purchaserswhoindicatedtheproductwas merelyofferedratherthanrecommendedrosesharply,from15percentin1977toabout 53percentin2001and44percentin2012(table2). Ineachof thesurveyyearsexcept1985,morethanone-half of thosewhodidnotpurchase aprotectionproductonclosed-endconsumercreditreportedthatprotectionproductswere notevenmentionedbythelender.Evenintheexceptionyear1985,theproportionof those surveyednothearinganymentionwasabout45percent.Itseemsdifficulttoarguethat peoplearecoercedintobuyinganadd-onorancillaryproducttoacredittransactionif itis notevenmentionedtothematthepointof sale.(Someof thepurchasersalsoindicatedit wasnotmentioned,whichmustmeaneithertheypurchaseditaftersomekindof follow-up ortheyrequesteditatthepointof salewithoutmentionbythelender.)Theproportionof nonpurchaserswhosaidtheproductswerenotmentionedapproachedtwo-thirds(63percent)in2012. Thesecondpartof thehypothesisisthatconsumerswhofeltpressuredtobuyanadd-on orancillaryproducttheydidnotwantwouldprobablynotbeveryfavorablyinclined towardtheadd-onorancillaryproduct.Toexaminethispossibility,consumerswithand withoutdebtprotectionwereaskedabouttheirfeelingstowardbuyingtheprotection,specificallywhethersuchpurchaseisagoodideaorabadidea. Experiencein2012confirmspriorfindingsthattheoverwhelmingmajorityof purchasers of debtprotectiononclosed-endconsumercreditconsiderthepurchasetobeagoodidea. Theproportionanswering“good”or“goodwithsomedegreeof qualification”exceeded 85percentineachof theinterviewyears(table3).Incontrast,theproportionresponding “bad”waslessthan10percentinallbutthemostrecentsurvey,inwhichtheproportion reached11percent.Theslightlyhigherincidenceof thisresponsein2012maybeanartifactof theprecedinglengthyrecession.Itseemspossiblethatif consumersfindthemselves inasituationinwhichtheyrealizeafterthefactthatanexpenditureoninsuranceoran insurance-likesubstitutedidnotresultinapayoff,theymaytosomedegreeregretthe expenditureatatimewhenbudgetsaretight.Of course,consumersdidnotsuffertheloss theyinsuredagainsteither,andthepeaceof mindentailedwiththeprotectionpurchase maystillresonatewithmanyof them. Table3alsodemonstratesthatattitudesaremuchdifferentbetweenpurchasersandnonpurchasersof theprotectionproducts.Forthenonpurchasers,attitudestowardtheprotec-
182 FederalReserveBulletin|December2012 Table3.Attitudestowarddebtprotectionamongusersofinstallmentcredit,1977–2012 Percentagedistributionsofusersofinstallmentcredit,withandwithoutdebtprotection Debtprotection Attitude 1977 1985 2001 2012 With Without With Without With Without With Without Good 86.7 59.8 89.9 56.4 88.5 32.3 85.5 53.8 Goodwithqualifications 8.6 18.9 2.9 8.3 3.8 6.1 * 3.2 Neithergoodnorbad 2.1 9.1 1.9 6.4 3.2 13.9 3.1 1.8 Badwithqualifications * 2.7 * 2.6 * 1.6 * 0.8 Bad 2.2 9.5 5.2 26.3 4.5 46.0 11.4 40.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 *Lessthan½of1percent. tionproductsaredecidedlylessfavorablethanamongpurchasers,althoughcertainlynot unfavorableineverycase.Forthosewithclosed-endconsumerinstallmentcreditoutstandingbutwhodidnotpurchasedebtprotection,theviewthatpurchasingprotectionis “good”or“goodwithqualifications”hasfallenfromoverthree-quarters(79percent)of respondentsin1977to38percentin2001,beforereboundingin2012againtoamajority (57percent).Itispossiblethatthisrecentupturnisalsoduetoheightenedconcernsabout financialdifficultiesasaresultof therecession.Nonetheless,asomewhathigherportionof nonpurchaserswithanunfavorableattitudetowardtheprotectionproductsisconsistent withtheirchoicesnottopurchase. Theattitudemeasurementin2012amongusersof creditotherthanclosed-endinstallment creditproducedlargelysimilarresults.Morethanfour-fifths(82percent)of thosewhopurchaseddebtprotectiononmortgagecreditexpressedafavorableattitude,andthefavorable feelingamongcreditcardholderswithprotection(77percent)wasalmostashigh(table4). Notsurprisingly,favorableviewsamongnonpurchasersof protectionagainweresomewhat lesscommononthesekindsof credit,buttheystillreached47percentamongmortgage creditusersand45percentamongcreditcardaccountholders.Likewise,48percentof thosewithnoclosed-endcreditoutstandingwerenotwhollypredisposedagainstdebtprotectionproducts(lowerrightgroupingintable4).Still,thedifferencesinattitudesbetween purchasersandnonpurchasersof debtprotectionproductssuggestthattheviewsof the formershouldbeconsideredinassessingthevalueof theseproducts.Itseemsunreasonable togiveundueweighttotheviewsof thosenotusingtheproductsinthefirstplace. Table4.Consumerattitudestowarddebtprotection,2012 Percent Installmentcredit Mortgagecredit Bankcard Noclosed-endcredit Attitude (noprotection) With Without With Without With Without Good 85.5 53.8 80.4 44.9 77.1 43.7 45.8 Goodwithqualifications * 3.2 1.3 2.0 * 1.7 1.9 Neithergoodnorbad 3.1 1.8 * 2.7 1.6 1.9 2.3 Badwithqualifications * 0.8 * * 0.5 0.3 0.4 Bad 11.4 40.5 18.3 50.3 20.8 52.3 49.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 *Lessthan½of1percent.
ConsumersandDebtProtectionProducts 183 Table5.Satisfactionwithpurchaseofdebtprotection,2001and2012 Percentagedistributionswithingroupsofcreditusers Installmentcredit Mortgagecredit Satisfiedwithpurchase? 2001 2012 2001 2012 Very 26.9 38.2 25.8 32.6 Somewhat 63.5 40.9 56.5 52.9 Subtotal:Satisfied 90.4 79.1 82.3 85.5 Neithersatisfiednordissatisfied 3.8 20.9 11.3 10.6 Somewhatdissatisfied 2.6 * 1.6 2.1 Verydissatisfied * * * 1.9 Donotknow/refuse 3.2 * 4.8 * Total 100.0 100.0 100.0 100.0 *Lessthan½of1percent. Attitudeswerealsomeasuredinarelatedbutsomewhatdifferentmanner.Specifically,purchasersof debtprotectionwereaskeddirectlyabouttheirsatisfactionwiththeprotection productpurchased.Obviously,thisviewcouldnotbeaskedof nonpurchasers.Again,using thismeasurement,purchasersof debtprotectionexpressedfavorableviews.Approximately four-fifthsof purchasersexpressedsatisfactionineachof theyearswhenmeasurements wereundertaken(table5).Relativelyfewexpresseddissatisfaction,althoughsomeappeared indifferent.Again,itappearsimportanttoremembertheviewsof usersaswellasnonusers inanydiscussionof thevalueof debtprotectionproducts. Purchasersalsoexpressedahighdegreeof willingnesstopurchasedebtprotectionon futurecredituse.Morethan70percentof purchasersindicatedawillingnesstopurchase againonbothinstallmentandmortgagecreditinboth2001and2012(table6).Whilea favorableattitudenowdoesnotnecessarilytranslatedirectlyintoapurchaselater,itisalso possiblethatactualpurchasescouldbehigherthantheattitudeexpressednow.Whenenteringintothenextcreditcontract,financialanxietiesmayresurfaceandpurchasingdebtprotectionmayagainproducethepeaceof mindthatitapparentlydidinmanycasesthistime. Noneof thesebehaviorssuggestthekindof unhappinesswithaproductthatmightariseif purchasersfeltthattheywerebeingpushedintothepurchaseorthattheproductitself was notveryuseful. Overall,favorableattitudesandwillingnesstopurchaseagainamongsomeconsumersdo notseemespeciallysurprising,giventheuncomfortablefeelingthatmanyconsumershave whenenteringintocreditarrangements.EvidencefromtheFederalReserveBoard’sSurvey of ConsumerFinancesdemonstrateslowlevelsof lifeinsuranceamongmanyfamilies.The mostrecentsurveyavailable(2010)showsthatmorethantwo-fifths(41percent)of families atthattimehadlessthan$10,000of lifeinsurancebutamongthem30percenthadamort- Table6.Willingnesstopurchasedebtprotectionagain,2001and2012 Percentagedistributionswithingroupsofcreditusers Installmentcredit Mortgagecredit Purchaseagain? 2001 2012 2001 2012 Yes 94.2 74.6 71.0 71.2 No 5.8 24.4 24.2 28.0 Donotknow/refuse * 1.0 4.8 0.8 Total 100.0 100.0 100.0 100.0 *Lessthan½of1percent.
184 FederalReserveBulletin|December2012 Table7.Lifeinsuranceholdingamongfamiliesin2010 Percent Medianincomeof Proportionofthese Proportionofthese Lifeinsuranceamount Proportionoffamilies families familieswithmortgage1 familieswithautocredit1 $10,000orless 37 $ 27,000 30 20 $10,001to$100,000 33 $ 40,000 39 28 $100,001to$500,000 21 $ 74,000 65 43 $500,001ormore 8 $141,000 80 39 Total 100 1 Proportionoffamilieswiththisamountoflifeinsurancewhohavecreditofthistypeoutstanding. Source:2010SurveyofConsumerFinances. gageloanoutstandingand20percenthadautomobilecredit.Medianfamilyincomeof this groupwas$27,000(table7).Another33percentof familieshadrelativelysmallamountsof lifeinsurance($10,001to$100,000)but39percenthadamortgageand28percenthadauto credit.Medianfamilyincomeof thisgroupwas$40,000.Itseemslikelythatmanyconsumersenteringintocreditarrangementsmaywellfeelthattheirunderinsuredconditionleaves themandtheirfamiliesvulnerabletounfortunatelifeevents.Thepurchaseof debtprotectiontocoverthisloanmayprovideprotectionagainstallowingthisloantoaddtopotential futuredislocation,evenif itisnotacomprehensiveinsuranceorfinancialplanning solution. Conclusion Insum,nationwideconsumersurveyresultsindicatethatsalespenetrationof debtprotectionproductshasfallenoverrecentdecades.Itappearsthatatleastpartof thistrendarises fromthedecliningpromotionof theseproductsattheclosingof loans.Incontrast,consumerattitudesamongpurchasershavenotchangedfromthehighlevelsof favorableviews of usersinthepast.Purchasershavealwaysbeenfavorablyinclinedtotheseproductsand therecentsurveyshowsthattheyremainso.Attitudesof purchasersarerelativelymore favorablethanamongnonpurchasers,whichlikelyatleastpartlyexplainswhyonegroupof consumerspurchasesandtheotherdoesnot,butevenmanynonpurchasersremainfavorablyinclinedtowardtheseproducts. Itseemsthatthemarketplaceoffersconsumersachoiceconcerningthepurchaseof debt protectionproductsandconsumersexercisethatchoiceaspartof theirfinancialdecisions aboutborrowing.Whiletheremaybeabusivepracticesamongsomelenderswhooperate outsidetherealmof ethicalbehaviorwithrespecttothesaleof debtprotectionproducts, surveyevidencesuggeststhat,intheviewsof consumers,suchbehaviorisnotthenorm.
185 Federal Reserve BULLETIN July 2012 Vol. 98, No. 3 Legal Developments: Fourth Quarter, 2011 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Banco do Brasil, S.A. Brasilia, Brazil Caixa de Previdência dos Funcionarios do Banco do Brasil Rio de Janiero, Brazil OrderApprovingtheAcquisitionof aBank BancodoBrasil,S.A.(“BancodoBrasil”),Brasilia,andCaixadePrevidênciadosFuncionariosdoBancodoBrasil(“Previ”),RiodeJaniero,bothof Brazil(together,“Applicants”),haverequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyActof 1956,asamended(“BHCAct”),1toacquireEuroBank,CoralGables,Florida (“EuroBank”). Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister36923(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. BancodoBrasil,withtotalconsolidatedassetsequivalentto$520.1billion,isthelargest bankingorganizationinBrazilbasedonassetsize.2BancodoBrasilalsooperatesbranches inNewYork,NewYork,andMiami,Florida;maintainsrepresentativeofficesinWashington,D.C.,Orlando,Florida,andWhitePlains,NewYork;andwhollyownsindirectlyBB MoneyTransfers,Inc.,alicensedmoneytransmitteroperatingin14states.BancodoBrasil alsomaintainsasecuritiesbroker-dealersubsidiaryinNewYork,NewYork,Bancodo BrasilSecuritiesLLC,andowns50percentof thesharesof BancoVotorantim,aBrazilian bankthatownsasecuritiesbroker-dealersubsidiaryinNewYork,NewYork,Banco VotorantimSecurities,Inc. BancodoBrasilisandwouldremainaqualifyingforeignbankingorganizationunderthe Board’sRegulationKandistreatedasafinancialholdingcompanyundersection4(l)of theBHCAct.TheBraziliangovernmentownsapproximately59.1percentof Bancodo 1 12U.S.C.§1842. 2 AssetandrankingdataareasofSeptember30,2011,andarebasedontheexchangerateasofthatdate.
186 FederalReserveBulletin|July2012 Brasil’sshares.3Previ,thepensionplanforBancodoBrasilemployees,ownsapproximately 10.4percentof BancodoBrasil’sshares.4 EuroBank,withtotalconsolidatedassetsof $83millionoperatesonlyinFloridaandisthe 245thlargestdepositoryorganizationinFlorida,controllingdepositsof approximately $81million(lessthan1percentof depositsinthestate).5BancodoBrasildoesnot currentlyoperateaninsureddepositoryinstitutioninFlorida. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposedbankacquisitionthatwouldsubstantiallylessencompetitioninany relevantbankingmarketunlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.6 BancodoBrasildoesnotcurrentlycompetewithEuroBankinanyrelevantbankingmarket.7Accordingly,theBoardconcludes,basedonallthefactsof record,thatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionoronthe concentrationof bankingresourcesinanyrelevantbankingmarketandthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposaland certainothersupervisoryfactors.TheBoardhascarefullyconsideredthesefactorsinlight of allthefactsof record,includingconfidentialsupervisoryandexaminationinformation fromtheU.S.bankingsupervisorsof theinstitutionsinvolved,andpubliclyreportedand otherfinancialinformation,includinginformationprovidedbyApplicants.Inaddition,the BoardhasconsultedwithBancoCentraldoBrasil(“BCB”),theagencywithprimary responsibilityforthesupervisionandregulationof Brazilianbankingorganizations, includingBancodoBrasil.TheBoardalsohasconsultedwiththeFederalDepositInsuranceCorporation(“FDIC”)andtheFloridaOfficeof FinancialRegulation(“FOFR”), thefederalandstateagencies,respectively,withprimaryresponsibilityforthesupervision andregulationof EuroBank. 3 BancodoBrasilshareownershipdataareasofJune30,2011. 4 PreviisasubsidiaryofBancodoBrasilforpurposesoftheBHCActbecauseBancodoBrasilselectsthreeof thesixPrevidirectors;aBancodoBrasilappointeeonthePreviboardisgrantedtie-breakingvotingpower; andBancodoBrasilselectsthreeofthesixPreviexecutiveboardmembers(andeachPreviexecutiveboard decisionmustbeapprovedbyatleastoneBancodoBrasilappointee).Previisconsideredtobeaparentof BancodoBrasilbyvirtueofitsshareownershipinBancodoBrasilanditsdisproportionatevotingpowerto electthreeofthesevendirectorsontheBancodoBrasilboard.Consequently,Previhasalsoappliedfor approvaltoacquireEuroBank.Previisandwouldremainsubjecttoallactivityrestrictionsapplicabletoqualifyingforeignbankingorganizations. 5 AssetdataareasofSeptember30,2011.StatewidedepositandrankingdataareasofJune30,2010. 6 12U.S.C.§1842(c)(1). 7 BancodoBrasiloperatesabranchofficeintheMiamibankingmarketthatdoesnotofferinsureddeposits.On consummationoftheproposal,BancodoBrasil’shomestateundertheBHCActwouldbeFlorida.
LegalDevelopments:FourthQuarter,2011 187 Inevaluatingthefinancialfactorsinproposalsinvolvingbankingorganizations,theBoard reviewsthefinancialconditionof theapplicantsandthetargetdepositoryinstitution.8In assessingfinancialresources,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombined organization,includingitscapitalposition,assetquality,andearningsprospects,andthe impactof theproposedfundingof thetransaction. TheBoardhascarefullyconsideredthefinancialresourcesof theorganizationsinvolvedin theproposal.Thecapitallevelsof BancodoBrasilexceedtheminimumlevelsthatwould berequiredundertheBaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldberequiredof aU.S.bankingorganizationseekingtoacquire EuroBank.Theproposedtransactionisstructuredasacashpurchaseof shares.Bancodo Brasilwoulduseexistingresourcestofundthepurchaseof shares.Inlightof therelative sizeof BancodoBrasilinrelationtoEuroBank,thetransactionwouldhaveaminimal impactonBancodoBrasil’sfinancialcondition.BancodoBrasilhasbeenprofitableand wouldinjectadditionalcapitalintoEuroBank,causingEuroBanktobewellcapitalized. Basedonitsreviewof therecord,theBoardfindsthatApplicantshavesufficientfinancial resourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof BancodoBrasil’sU.S.operationsandof EuroBank.Inaddition,theBoardhasconsidered itssupervisoryexperienceandthatof otherrelevantbankingsupervisoryagencieswiththe organizationsandtheirrecordsof compliancewithapplicablebankingandanti-moneylaunderinglaws.Asnoted,theBoardhasconsultedwiththeBCB.TheBoardalsohasconsideredBancodoBrasil’splansforimplementingtheacquisition,includingtheproposed managementafterconsummation. Section3of theBHCActprovidesthattheBoardmaynotapproveanapplicationinvolvingaforeignbankunlessthebankissubjecttocomprehensivesupervisionorregulationon aconsolidatedbasisbytheappropriateauthoritiesinthebank’shomecountry.9Asnoted, theBCBistheprimarysupervisorof Brazilianbanks,includingBancodoBrasil.The BoardpreviouslyhasdeterminedthatBancodoBrasilissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisor.10BancodoBrasilcontinuesto besupervisedbytheBCBonsubstantiallythesametermsandconditions.Basedonthis findingandallthefactsof record,includingconsultationwiththeBCB,theBoardhas concludedthatBancodoBrasilcontinuestobesubjecttocomprehensivesupervisionona consolidatedbasisbyitshomecountrysupervisor. 8 AcommenterexpressedconcernsaboutEuroBank’sfinancialconditionandmanagement,includingconcerns basedonaNoticeofChargesandofHearingissuedbytheFDIConMay3,2011.TheBoardhasreviewedthe financialandmanagerialfactorsinthisproposal,includingthosecomments,inthecontextofthefinancialand managerialconditionofApplicantsandtheresultingorganization.Moreover,asnotedabove,theBoardhas consultedwiththeFDICandtheFOFR. 9 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).Inassessingthisstandardundersection211.24ofRegulationK,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors: (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetween thebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandrisk assetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 10 SeeBoardlettertoKathleenA.Scott,Esq.datedApril13,2010.
188 FederalReserveBulletin|July2012 Inevaluatingthisproposal,theBoardalsoconsideredwhetherPreviissubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesin itshomecountry.TheBoardhaspreviouslydeterminedthatthesystemof comprehensive supervisionorregulationof acompanymayvary,dependingonthenatureof theacquiring companyandtheproposedinvestment.11TheBoardbelievesthatPrevimaybefoundtobe subjecttoanappropriatetypeandlevelof comprehensiveregulationonaconsolidated basis,givenitsnature,andstructure,andthefactthatBancodoBrasilwouldexerciseeffectivecontroloverandmanagetheoperationsof EuroBank.Previisthepensionplanfor BancodoBrasilemployeesand,assuch,issubjecttoregulationbytheSuperintendência NacionaldePrevidênciaComplementar,thesupervisorof pensionfundsinBrazil (“PREVIC”),andComissãodeValoresMobiliários,thesecuritiesandexchangecommissionof Brazil(“CVM”).PREVICandCVMconductannualandperiodicinspectionsof Previ,respectively,andrequirePrevitosubmitreportsaboutitsoperations.Specifically, PrevifilesreportswithPREVICconcerningitsinvestments,benefitsprovided,actions takentopreventandcombatmoneylaunderingandconcealmentof assets,internalcontrols,andupdatesonnewstatutesandregulationsapplicabletoPrevi.Basedonallthefacts of record,theBoardhasdeterminedthatPreviissubjecttocomprehensivesupervisionon aconsolidatedbasisbyitsappropriatehomecountryauthoritiesforpurposesof this application. Section3of theBHCActalsorequirestheBoardtotakeintoconsiderationtheextentto whichtheproposedacquisitionwouldresultingreaterormoreconcentratedrisktothestabilityof theU.S.bankingorfinancialsystem.12TheBoardhascarefullyconsideredthe proposal’spotentialimpactsunderthefinancialstabilityfactor.Basedonitsreviewof the record,includingconsiderationof thesmallsizeandscopeof theoperationsof EuroBank, theBoardfindsthattheproposedacquisitionwouldnotresultingreaterormoreconcentratedrisktothestabilityof theU.S.bankingorfinancialsystem. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactorsunderthe BHCAct.13 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardisrequiredtoconsider theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved andtotakeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunder 11 SeeChuoMitsuiTrustHoldings,Inc.,97FederalReserveBulletin30(2011);ChinaInvestmentCorporation,96 FederalReserveBulletinB31(2010). 12 12U.S.C.§1842(c)(7),asaddedbysection604(d)oftheDodd-FrankWallStreetReformandConsumerProtectionAct,PublicLaw111-203,124Stat.1376. 13 Section3oftheBHCActalsorequirestheBoardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofits affiliatesthattheBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct.12U.S.C. §1842(c)(3)(A).TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich BancodoBrasiloperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccessto information.Inaddition,BancodoBrasilhascommittedthat,totheextentnotprohibitedbyapplicablelaw,it willmakeavailabletotheBoardsuchinformationontheoperationsofitsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,andotherapplicablefederallaws.BancodoBrasilalsohascommittedtocooperatewiththeBoardtoobtainanywaiversor exemptionsthatmaybenecessarytoenableitsaffiliatestomakesuchinformationavailabletotheBoard.Based onallfactsofrecord,includingtheconditionsinthisorder,theBoardhasconcludedthatBancodoBrasilhas providedadequateassurancesofaccesstoanyappropriateinformationtheBoardmayrequest.
LegalDevelopments:FourthQuarter,2011 189 theCommunityReinvestmentAct(“CRA”).14TheCRArequiresthefederalfinancial supervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentire community,includinglow-andmoderate-incomeneighborhoods,inevaluatingbank expansionaryproposals.15 TheBoardhasconsideredcarefullyallthefactsof record,includingevaluationsof the CRAperformancerecordof EuroBank,16datareportedbyEuroBankundertheHome MortgageDisclosureAct(“HMDA”),17otherinformationprovidedbyApplicants,confidentialsupervisoryinformation,andpubliccommentreceivedontheproposal.ThecommenterallegedthatEuroBankhadengagedindisparatetreatmentof AfricanAmerican individualsinhomemortgagelending. A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasreviewedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof therelevantinsureddepository institution’sCRAperformancerecords.Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,on-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor.18 EuroBankreceiveda“Satisfactory”ratingatitsmostrecentCRAperformanceevaluation bytheFDIC,asof March17,2009.TheBoardalsohasconsultedwiththeFDICregardingtheactivitiesof EuroBanksincethe2009CRAperformanceevaluation. B.HMDAandFairLendingRecords TheBoardhascarefullyconsideredtheHMDAdatafor2009and2010reportedby EuroBankinitsassessmentareaandintheMiamimetropolitanstatisticalareaof concern tothecommenterandhasalsoconsideredthefairlendingrecordsof EuroBank,inlightof publiccommentreceivedontheproposal.Commenteralleged,basedonHMDAdata reportedin2009,thatEuroBankhadengagedindisparatetreatmentof AfricanAmerican individualsinhomemortgagelending. AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconcludewhether ornotEuroBankisexcludingorimposinghighercostsonanygrouponaprohibitedbasis. TheBoardrecognizesthatHMDAdataalone,evenwiththerecentadditionof pricing information,provideonlylimitedinformationaboutthecoveredloans.19HMDAdata, 14 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 15 12U.S.C.§2903. 16 BancodoBrasilcurrentlydoesnotoperateaninsureddepositoryinstitutionintheUnitedStates.Accordingly, BancodoBrasil’sU.S.operationsarenotsubjecttoperformanceevaluationsundertheCRA. 17 12U.S.C.§2801etseq. 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 19 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In
190 FederalReserveBulletin|July2012 therefore,havelimitationsthatmakethemaninadequatebasis,absentotherinformation, forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedatacarefully andtakenintoaccountotherinformation,includingexaminationreportsthatprovideonsiteevaluationsof compliancewithfairlendinglawsbyEuroBank. Therecordof thisproposal,includingconfidentialsupervisoryinformation,indicatesthat EuroBankhastakenstepstoensurecompliancewithfairlendingandotherconsumerprotectionlaws.EuroBankhasinplaceaformalfairlendingpolicyandprogramthatincludes itshomemortgageandsmallbusinesslendingoperations.EuroBankalsoprovidesinternal compliancetraining,andthebank’sstaffsinbankmanagement,line-of-business,andcomplianceattendoutsideconferencesandseminarsandotherfairlendingandconsumerprotectiontrainingsessions.BancodoBrasilhasindicatedthatthecombinedinstitutionwould continuetohavesuchpoliciesandproceduresonconsummationof theproposal. TheBoardalsohasconsideredtheHMDAdatainlightof otherinformation,includingthe overallperformancerecordof EuroBankundertheCRA.EuroBank’sestablishedefforts andrecordsof performancedemonstratethattheinstitutionisnotexcludingindividualsor geographiesonaprohibitedbasis,contrarytotheallegationsof thecommenter.20Infact, inthefairlendingreviewconductedatthemostrecentCRAexaminationof EuroBank,the FDICfoundnoevidenceof illegalcreditdiscrimination.Moreover,theFDICdetermined inthe2009examinationthatthegeographicdistributionof thebank’ssmallbusinessloans reflectedastrongperformanceintheassessmentarea. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredcarefullyallthefactsof record,includingreportsof examinationof theCRArecordsof theinstitutionsinvolved,informationprovidedbyApplicants, thepubliccommentreceivedontheproposal,andconfidentialsupervisoryinformation. Applicantsrepresentthattheproposalwouldresultinincreasedcreditavailabilityand accesstoabroaderarrayof financialproductsandservicesforcustomersof thecombined organization.Basedonareviewof theentirerecord,andforthereasonsdiscussedabove, theBoardconcludesthatconsiderationsrelatingtotheconvenienceandneedsfactorand theCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistent withapprovalof theproposal. addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. 20 BancodoBrasilhasrepresentedthatEuroBankdoesnotengageinextensivemarketingofconsumercredit productsandthatEuroBank’sloansconsistlargelyofcommercialloans,includingsmallbusinessloans.Asa result,EuroBankreceivedasmallnumberofHMDA-reportableloanapplications,includingapplicationsfrom minorityindividuals,andmadeasmallnumberofHMDA-reportableloans.Theapplicationandlendingvolumesweretoosmalltodrawanystatisticallysignificantconclusions.
LegalDevelopments:FourthQuarter,2011 191 Conclusion Basedontheforegoing,andinlightof allthefactsof record,theBoardhasdetermined thattheapplicationshouldbe,andherebyis,approved.21Inreachingitsconclusion,the Boardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicablestatutes.22Shouldanyrestrictionsonaccess toinformationontheoperationsoractivitiesof BancodoBrasiloranyof itsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforce compliancebyBancodoBrasiloritsaffiliateswithapplicablefederalstatutes,theBoard mayrequireterminationof anyof .BancodoBrasil’soritsaffiliates’directorindirect activitiesintheUnitedStates.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswiththeconditionsinthisorderandallthecommitmentsmadetothe Boardinconnectionwiththeproposal.Forpurposesof thisaction,thesecommitments andconditionsaredeemedtobeconditionsimposedinwritingbytheBoardinconnection withitsfindingsanddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBankof NewYork,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember16,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Brookline Bancorp, Inc. Brookline, Massachusetts OrderApprovingtheAcquisitionof aBankHoldingCompany BrooklineBancorp,Inc.(“Brookline”),Brookline,Massachusetts,hasrequestedthe Board’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to acquireBancorpRhodeIsland,Inc.(“BancorpRI”)anditssubsidiarybank,BankRhode Island(“BankRI”),bothof Providence,RhodeIsland. 21 CommenterrequestedthattheBoardholdapublichearingontheproposal.Section3(b)oftheBHCActdoes notrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthorities forthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR 225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities. Underitsregulations,theBoardalsomay,initsdiscretion,holdapublichearingonanapplicationtoacquirea bankifnecessaryorappropriatetoclarifyfactualissuesrelatedtotheapplicationandtoprovideanopportunityfortestimony.12CFR262.3(e)and262.25(d).TheBoardhasconsideredcarefullythecommenter’srequest inlightofallthefactsofrecord.IntheBoard’sview,thecommenterhadampleopportunitytosubmitviews and,infact,submittedwrittencommentsthattheBoardhasconsideredcarefullyinactingontheproposal. TherequestfailstoidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublichearing.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied. 22 ThecommenteralsoallegedthatBancodoBrasilisfundingenvironmentallyharmfulprojectsinBrazil.The commentsconcernmattersthatarebeyondthestatutoryfactorstheBoardisauthorizedtoconsider.SeeWesternBancshares,Inc.v.BoardofGovernors,480F.2d749(10thCir.1973). 1 12U.S.C.§1842.
192 FederalReserveBulletin|July2012 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister35893(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Brookline,withtotalconsolidatedassetsof approximately$3.1billion,isthe227thlargest insureddepositoryorganizationintheUnitedStates,controlling$2.2billionindeposits.2 Brooklinecontrolstwosubsidiaryinsureddepositoryinstitutions,BrooklineBank, Brookline,andTheFirstNationalBankof Ipswich(“FNBI”),Ipswich,bothof Massachusetts,thatoperateonlyinMassachusetts.Brooklineisthe15thlargestdepositoryorganizationinMassachusetts,controllingdepositsof approximately$1.7billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutions inthestate. BancorpRI,withtotalconsolidatedassetsof $1.6billion,controlsBankRI,whichoperates onlyinRhodeIsland.BankRIisthesixthlargestinsureddepositoryinstitutioninRhode Island,controllingdepositsof $1.1billion. Onconsummationof theproposal,Brooklinewouldbecomethe165thlargestdepository organizationintheUnitedStates,withtotalconsolidatedassetsof approximately$4.7billion.Brooklinewouldcontroldepositsof approximately$3.3billion,whichrepresentless than1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates. InterstateAnalysis Section3(d)of theBHCActallowstheBoardtoapproveanapplicationbyabankholding companytoacquirecontrolof abanklocatedinastateotherthanthebankholdingcompany’shomestateif certainconditionsaremet.Forpurposesof theBHCAct,thehome stateof BrooklineisMassachusetts,3andBancorpRIislocatedinRhodeIsland.4 Basedonareviewof allthefactsof record,includingrelevantstatestatutes,theBoard findsthattheconditionsforaninterstateacquisitionenumeratedinsection3(d)aremetin thiscase.5Inlightof allfactsof record,theBoardispermittedtoapprovetheproposal undersection3(d)of theBHCAct. 2 DepositdataareasofJune30,2011,updatedtoreflectmergersthroughthatdate.Inthiscontext,insured depositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks.Nationaldeposit dataandrankingsareasofJune30,2011. 3 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 4 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A) and1842(d)(2)(B). 5 12U.S.C.§§1842(d)(1)(A)–(B)and1842(d)(2)–(3).Brooklineiswellcapitalizedandwellmanaged,asdefined byapplicablelaw.BankRIhasbeeninexistenceandoperatedfortheminimumperiodoftimerequiredby RhodeIslandlawandformorethanfiveyears.See12U.S.C.§1842(d)(1)(B)(i)–(ii).Onconsummationofthe proposal,Brooklinewouldcontrollessthan10percentofthetotalamountofdepositsofinsureddepository institutionsintheUnitedStates.12U.S.C.§1842(d)(2)(A).Brooklinealsowouldcontrollessthan30percentof thetotalamountofdepositsininsureddepositoryinstitutionsinRhodeIsland.12U.S.C.§1842(d)(2)(B)–(D). Allotherrequirementsofsection3(d)oftheBHCActwouldbemetonconsummationoftheproposal.
LegalDevelopments:FourthQuarter,2011 193 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposedbankacquisitionthatwouldsubstantiallylessencompetitioninany relevantbankingmarketunlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.6 BrooklineandBancorpRIdonotcompetedirectlyinanyrelevantbankingmarket.Based onallthefactsof record,theBoardhasconcludedthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of bankingresourcesinanyrelevantbankingmarketandthatcompetitivefactorsareconsistentwithapprovalof theproposal. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposaland certainothersupervisoryfactors.7TheBoardhascarefullyconsideredthosefactorsinlight of allthefactsof record,includingconfidentialsupervisoryandexaminationinformation receivedfromtherelevantfederalandstatesupervisorsof theorganizationsinvolvedinthe proposal,otherpubliclyavailablefinancialinformation,informationprovidedby Brookline,andpubliccommentreceivedontheproposal. Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhasconsidered capitaladequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,asset quality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredtheproposalcarefullyunderthefinancialfactors.Brookline, BrooklineBank,BancorpRI,andBankRIarewellcapitalizedandwillremainsoonconsummationof theproposal.FNBIisadequatelycapitalizedandalsowillremainsoonconsummationof theproposal.Theproposedtransactionisstructuredasapartialshare exchangeandapartialcashpurchaseof shares.Brooklinewillfundthecashportionof the acquisitionfromaspecialdividendfromBrooklineBank,whichtheOfficeof theComptrollerof theCurrency(“OCC”)hasapproved.Basedonitsreviewof therecord,the BoardfindsthatBrooklinehassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Brookline,BancorpRI,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the Boardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervi- 6 12U.S.C.§1842(c)(1). 7 12U.S.C.§1842(c)(2)and(3).
194 FederalReserveBulletin|July2012 soryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws.Brooklineanditssubsidiarydepositoryinstitutions areconsideredtobewellmanaged.TheBoardhascarefullyconsideredthecommentit receivedontheproposal.8TheBoardalsohasconsideredBrookline’splansforimplementingtheproposal,includingtheproposedmanagementafterconsummation.Inaddition, theBoardhasconsideredthefutureprospectsof theorganizationsinvolvedintheproposal inlightof financialandmanagerialresourcesandBrookline’sproposedbusinessplan. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors. ConvenienceandNeedsConsiderationsandFinancialStability Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).9TheCRArequiresthefederalfinancialsupervisoryagencies toencouragefinancialinstitutionstomeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income neighborhoods,inevaluatingbankacquisitionproposals.Accordingly,theBoardhascarefullyconsideredtheconvenienceandneedsfactorandtheCRAperformancerecordsof BrooklineBank,FNBI,andBankRIinlightof allthefactsof record. AsprovidedintheCRA,theBoardhasevaluatedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof theCRAperformancerecords of therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.10BrooklineBank,FNBI, andBankRIreceived“satisfactory”ratingsattheirmostrecentexaminationsforCRAperformancebytheOfficeof ThriftSupervision,theOCC,andtheFederalDepositInsurance Corporation,asof November3,2008,June2,2008,andJune25,2010,respectively.Moreover,thefactsof recorddonotreflectasubsequentdeclineintheCRAperformanceof any of thethreeinstitutionssincethoseexaminations. 8 AcommenterallegedthatmanagementofBrooklineBankisdeficientbecausethebankusedcommenter’s materialregardingreversemortgagesinviolationofcopyrightandtrademarklaw.Thecommenteralsoalleged thatBrooklineBankhasnotprovidedreversemortgagecandidateswithcounselinginviolationofstatelaw. Brooklinerepresentedthatitwasnotsubjecttostateapprovalrequirementsforreversemortgageloanprograms,hasnotmadereversemortgageloanssince2009,andhasnoplanstoresumeoriginatingreversemortgageloans.BrooklineBankalsohasreplaceditschiefexecutiveofficer,hiredafull-timecomplianceofficer,and addedcompliancestaffsince2009,whichshouldstrengthenitsmonitoringproceduresandcomplianceaudit process.Moreover,Brooklinenotedthatwiththeassistanceofanindependentcompliancecompany,itis reviewingallrelevantloansandwillremedyanyidentifiedcomplianceissuestoensurethatnoneoftheborrowershasbeenorwillbeoverchargedbecauseofinadequatedisclosure.Inevaluatingthefinancialandmanagerial factorsthattheBoardmustconsiderundersection3oftheBHCAct,theBoardhasconsideredtheseand otherfactsofrecordwithrespecttolitigationinvolvingthecopyrightandtrademarkmatters,informationprovidedbyBrooklineregardingitsreversemortgageloans,andconfidentialsupervisoryinformation,including recordsofcompliancewithconsumerlawsandregulations. 9 12U.S.C.§§2901etseq.;12U.S.C.§1842(c)(2). 10 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010).
LegalDevelopments:FourthQuarter,2011 195 Basedonallthefactsof recordandforthereasonsdiscussedabove,theBoardconcludes thatconsiderationsrelatingtoconvenienceandneeds,includingtheCRAperformance recordsof therelevantdepositoryinstitutions,areconsistentwithapprovalof theproposal. TheBoardhasalsocarefullyconsideredinformationrelevanttoriskstothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardconcludesthatfinancialstability considerationsinthisproposalareconsistentwithapproval. Conclusion Basedontheforegoing,andinlightof allthefactsof record,theBoardhasdetermined thattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,the Boardhasconsideredtheapplicationrecordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecifically conditionedoncompliancebyBrooklinewithalltheconditionsimposedinthisorderand thecommitmentsmadetotheBoardinconnectionwiththeapplication,includingreceipt of allrequiredregulatoryapprovals.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwith itsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposedtransactionmaynotbeconsummatedbeforethefifteenthcalendardayafter theeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof this order,unlesssuchperiodisextendedforgoodcausebytheBoardortheFederalReserve Bankof Boston,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember9,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Goering Management Company, LLC Moundridge, Kansas Goering Financial Holding Company Partnership, L.P. Moundridge, Kansas Bon, Inc. Moundridge, Kansas OrderApprovingtheAcquisitionof aBankHoldingCompany GoeringManagementCompany,LLC(“GoeringManagement”)anditssubsidiaries, GoeringFinancialHoldingCompanyPartnership,L.P.(“GoeringFinancial”)andBon, Inc.(collectively,“Bon”),allof Moundridge,1haverequestedtheBoard’sapprovalunder 1 GoeringManagement,GoeringFinancial,andBonarebankholdingcompaniesundertheBHCActthathave madeeffectiveelectionstobefinancialholdingcompanies.GoeringManagementandGoeringFinancialare bankholdingcompaniesbecausetheycontrolBon,Inc.,abankholdingcompanythatdirectlycontrolsone bank,TheCitizensStateBank,alsoofMoundridge.
196 FederalReserveBulletin|July2012 section3of theBankHoldingCompanyAct(“BHCAct”)2toacquireHomeStateBancshares,Inc.HomeStateBancshares,Inc.(“HomeState”)anditssubsidiarybank,Home StateBank&TrustCompany(“HomeStateBank”),bothof McPherson,allof Kansas. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister56760(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Bon,withtotalconsolidatedassetsof approximately$265million,isthe2612thlargest insureddepositoryorganizationintheUnitedStates.3Bon’ssubsidiarybank,TheCitizens StateBank,operatesonlyinKansas.Bonisthe57thlargestinsureddepositoryorganizationinKansas,controllingdepositsof approximately$218.3million,whichrepresentless than1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe state. HomeState,withtotalconsolidatedassetsof $133million,controlsHomeStateBank, whichalsooperatesonlyinKansas.HomeStateBankisthe110thlargestinsureddepositoryinstitutioninKansas,controllingdepositsof $105.4million,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. Onconsummationof theproposal,Bonwouldbecomethe1754thlargestinsureddepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately $398million.Bonwouldcontroldepositsof approximately$323.7million,whichrepresent lessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates.InKansas,Bonwouldbecomethe38thlargestdepositoryorganizationand controllessthan1percentof depositsof insureddepositoryinstitutionsinthestate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposedbankacquisitionthatwouldsubstantiallylessencompetitioninany relevantbankingmarketunlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.4 TheCitizensStateBankandHomeStateBankcompetedirectlyintheMcPherson,Kansas bankingmarket.5TheBoardhasreviewedcarefullythecompetitiveeffectsof theproposal inthisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket,therelative sharesof totaldepositsindepositoryinstitutionsinthemarket(“marketdeposits”)controlledbyBonandHomeState,6theconcentrationlevelsof marketdepositsandthe increaseinthoselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under 2 12U.S.C.§1842. 3 AssetdataareasofSeptember30,2011.DepositdataareasofJune30,2011.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 4 12U.S.C.§1842(c)(1). 5 TheMcPhersonmarketisdefinedasMcPhersonCountyandthetownsofCrawford,LittleRiver,andMitchell inRiceCounty,allinKansas. 6 DepositandmarketsharedataareasofJune30,2011.
LegalDevelopments:FourthQuarter,2011 197 theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJGuidelines”),7andothercharacteristicsof themarket. Thestructuraleffectsthatconsummationof theproposalwouldhaveontheMcPherson bankingmarketwarrantadetailedreviewbecausetheconcentrationlevelonconsummationwouldexceedthethresholdlevelsintheDOJGuidelines.TheCitizensStateBankis thesecondlargestinsureddepositoryinstitutionintheMcPhersonbankingmarket,controllingdepositsof approximately$113.2million,whichrepresentapproximately16.2percentof themarketdeposits.HomeStateBankisthethirdlargestinsureddepositoryinstitutionintheMcPhersonbankingmarket,controllingdepositsof approximately $105.4million,whichrepresentapproximately15.1percentof themarketdeposits.Onconsummation,theHHIinthismarketwouldincreaseby489points,from1577to2066,and TheCitizensStateBankwouldbecomethelargestbankingfirminthemarketwithapro formashareof marketdepositsof approximately31.3percent. TheBoardhasconsideredcarefullywhetherotherfactorseithermitigatethecompetitive effectsof theproposalorindicatethattheproposalwouldhaveasignificantlyadverse effectoncompetitionintheMcPhersonbankingmarket.8Severalfactorsindicatethatthe increaseinconcentrationintheMcPhersonbankingmarket,asmeasuredbytheHHIand shareof marketdeposits,overstatesthepotentialcompetitiveeffectsof theproposalinthe market.Afterconsummationof theproposal,12othercommercialbankcompetitors wouldremain,somewithasignificantpresenceinthemarket.Thesecondlargestbank competitorinthemarketwouldcloselyapproximatethesizeof Bononconsummation, controllingabout29.5percentof marketdeposits.Anotherbankcompetitorwouldcontrol morethan10percentof marketdeposits.Inaddition,themarketdepositsof sixother bankcompetitorsinthemarkethaverecentlyincreasedataratewellabovethegrowthrate of marketdepositsforBonorHomeState.9 TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencyhasbeenaffordedanopportunitytocommentandhasnot objectedtotheproposal. Basedontheseandotherfactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,basedonallthefactsof record,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. 7 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points. AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMergerGuidelines, theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin1995,werenot changed.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 8 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 9 From2005to2010,themarketdepositsofsixbankswithmarketsharessmallerthanBonandHomeState increasedatratesrangingfrom28percentto113percent.Duringthesametimeperiod,themarketdepositsof BonandHomeStateincreasedby15percentand19percent,respectively.
198 FederalReserveBulletin|July2012 Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposaland certainothersupervisoryfactors.10TheBoardhascarefullyconsideredthesefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationreceived fromtherelevantfederalandstatesupervisorsof theorganizationsinvolvedintheproposal,andotheravailablefinancialinformation,includinginformationprovidedbyBon. Inevaluatingfinancialfactorsinexpansionproposalsbybankingorganizations,theBoard reviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyand consolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhasconsidered capitaladequacytobeespeciallyimportant.TheBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,asset quality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardhasconsideredtheproposalcarefullyunderthefinancialfactors.Bon,Home State,andtheirsubsidiarydepositoryinstitutionsarewellcapitalizedandwouldremainso onconsummationof theproposal.Theproposedtransactionisstructuredasacashpurchaseof shares.Bonwilluseexistingcashresourcesandtheproceedsof anewdebtissuancetofundthepurchase.Basedonitsreviewof therecord,theBoardfindsthatBonhas sufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Bon,HomeState,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof theotherrelevantbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking law,includinganti-money-launderinglaws.Bonanditssubsidiarydepositoryinstitution areconsideredtobewellmanaged.TheBoardalsohasconsideredBon’splansforimplementingtheproposal,includingtheproposedmanagementafterconsummationof theproposal.Inaddition,theBoardhasconsideredthefutureprospectsof theorganizations involvedintheproposalinlightof thefinancialandmanagerialresourcesandtheproposed businessplan. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactorsunderthe BHCAct. ConvenienceandNeedsConsiderationsandFinancialStability Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).11TheCRArequiresthefederalfinancialsupervisoryagencies 10 12U.S.C.§1842(c)(2)and(3). 11 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2).
LegalDevelopments:FourthQuarter,2011 199 toencouragefinancialinstitutionstomeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income neighborhoods,inevaluatingbankacquisitionproposals.Accordingly,theBoardhascarefullyconsideredtheconvenienceandneedsfactorandtheCRAperformancerecordsof TheCitizensStateBankandHomeStateBankinlightof allthefactsof record. AsprovidedintheCRA,theBoardhasevaluatedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof theCRAperformancerecords of therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.12TheCitizensStateBank andHomeStateBankreceived“satisfactory”ratingsattheirmostrecentexaminationsfor CRAperformancebytheFederalDepositInsuranceCorporationasof November3,2008, andJanuary11,2010,respectively. Basedonallthefactsof recordandforthereasonsdiscussedabove,theBoardconcludes thatconsiderationsrelatingtotheconvenienceandneeds,includingtheCRAperformance recordsof therelevantdepositoryinstitutions,areconsistentwithapprovalof theproposal. TheBoardhasalsocarefullyconsideredinformationrelevanttoriskstothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardconcludesthatfinancialstability considerationsinthisproposalareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationundersection3of theBHCActshouldbe,andherebyis,approved.Inreachingits conclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitis requiredtoconsiderundertheBHCAct.TheBoard’sapprovalisspecificallyconditioned oncompliancebyBonwithalltheconditionsimposedinthisorderandallthecommitmentsmadetotheBoardinconnectionwiththeapplicationandonreceiptof allother requiredregulatoryapprovalsfortheproposal.Theseconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof KansasCity,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember28,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 12 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010).
200 FederalReserveBulletin|July2012 The PNC Financial Services Group, Inc. Pittsburgh, Pennsylvania PNC Bancorp, Inc. Wilmington, Delaware OrderApprovingAcquisitionof aStateMemberBank ThePNCFinancialServicesGroup,Inc.,afinancialholdingcompanywithinthemeaning of theBankHoldingCompanyAct(“BHCAct”),anditswhollyownedsubsidiary,PNC Bancorp,Inc.,abankholdingcompanywithinthemeaningof theBHCAct(jointly, “PNC”),haverequestedtheBoard’sapprovalundersection3of theBHCAct1toacquire RBCBank(USA),Raleigh,NorthCarolina(“RBCBank”),astatememberbank,from RBCUSAHoldcoCorporation,awhollyownedsubsidiaryof theRoyalBankof Canada.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister50480(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. PNC,withtotalconsolidatedassetsof approximately$263billionasof June30,2011,is theseventhlargestdepositoryorganizationintheUnitedStates,controllingdepositsof approximately$180billion,whichrepresentapproximately2percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.PNCBankoperatesinsixteenstatesandtheDistrictof Columbia3andengagesinnumerousnonbankingactivities thatarepermissibleundertheBHCAct.4PNCBankisthelargestinsureddepositoryorganizationinPennsylvania,controllingdepositsof approximately$62billion,whichrepresent 21percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. PNCBankisthe14thlargestinsureddepositoryorganizationinFlorida,controlling depositsof approximately$5billion,andthe82ndlargestinsureddepositoryinstitutionin Georgia,controllingdepositsof $237million,whichrepresent1.2percentandlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthosestates, respectively. RBCBank,withtotalconsolidatedassetsof approximately$27billionasof June30,2011, operatesinAlabama,Florida,Georgia,NorthCarolina,SouthCarolina,andVirginia.In NorthCarolina,RBCBankisthefifthlargestdepositoryinstitution,controllingdeposits inthestateof approximately$10billion.RBCBankisthe20thlargestinsureddepository institutioninFloridaandtheeighthlargestinsureddepositoryinstitutioninGeorgia,controllingdepositsof approximately$3billionineachof thosestates. 1 12U.S.C.§1842. 2 Aftertheacquisition,PNCplanstomergeRBCBankwithandintoitsonlysubsidiarydepositoryinstitution, PNCBank,NationalAssociation,Pittsburgh(“PNCBank”). 3 PNCBankcurrentlyoperatesbranchesinDelaware,Florida,Georgia,Illinois,Indiana,Kentucky,Maryland, Michigan,Missouri,NewJersey,NewYork,Ohio,Pennsylvania,Virginia,WestVirginia,Wisconsin,andthe DistrictofColumbia.PNCBankalsohaslimited-purposebranchesinToronto,Canada,andNassau,The Bahamas. 4 PNChasa21percentfinancialinterestinBlackrock,Inc.(“Blackrock”),NewYork,NewYork,andholds almost24percentofthevotingsharesofBlackrock.Inaddition,PNCselectstwomembersofBlackrock’sseventeen-memberboardofdirectors,andPNCandBlackrockhaveanumberofbusinessrelationships.ForBHC Actpurposes,PNCisconsideredtocontrolBlackrock.Foraccountingandfinancialreportingpurposes,PNC treatsitsinterestinBlackrockasanequityinvestment.Blackrockisapubliclytradedcompanyandoneofthe largestassetmanagersintheworld,withapproximately$3.4trillioninassetsundermanagement.
LegalDevelopments:FourthQuarter,2011 201 Onconsummationof theproposal,PNCBankwouldbecomethefifthlargestdepository organizationintheUnitedStates,withconsolidateddepositsof $201billion,representing approximately2.2percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InPennsylvania,PNCBankwouldremainthelargestdepository organization,controllingdepositsof approximately$62billion(approximately21percent of depositsof insureddepositoryinstitutionsinthestate).InFlorida,PNCBankwould becometheninthlargestdepositoryorganization,controllingdepositsof approximately $8billion(approximately2percentof depositsof insureddepositoryinstitutionsinthe state),andinGeorgia,PNCBankwouldbecometheeighthlargestdepositoryorganization,controllingdepositsof approximately$3.1billion(approximately1.7percentof depositsof insureddepositoryinstitutionsinthestate). InterstateandDepositCapAnalyses Section3of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding company(“BHC”)thatiswellcapitalizedandwellmanaged5toacquireabanklocatedina stateotherthanthehomestateof theBHCwithoutregardtowhetherthetransactionis prohibitedunderstatelaw.However,thissectionfurtherprovidesthattheBoardmaynot approveanapplicationthatwouldpermitanout-of-stateBHCtoacquireabankinahost statethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.6Inaddition,theBoardmaynotapproveanapplicationbyaBHCto acquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthehomestateof theBHC,andtheapplicantcontrolsorwould controlmorethan10percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates(“nationwidedepositcap”).7 Forpurposesof theBHCAct,thehomestateof PNCisPennsylvaniaandRBCBank’s homestateisNorthCarolina.8PNCiswellcapitalizedandwellmanagedunderapplicable law.NorthCarolinalawhasnominimumagerequirement,9andRBCBankhasbeenin existenceformorethanfiveyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutionsinthe UnitedStates,thetotalamountof depositsof insureddepositoryinstitutionsis$8.9trillion.Onconsummationof theproposedtransaction,PNCwouldcontrolapproximately 2.2percentof thetotalamountof depositsininsureddepositoryinstitutionsintheUnited States.Accordingly,inlightof allthefactsof record,theBoardisnotrequiredtodenythe proposalundersection3(d)of theBHCAct. 5 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”),Pub.L.No.111–203,124Stat.1376,codifiedat12U.S.C.§1842(d)(1)(A). 6 12U.S.C.§1842(d)(i)(B). 7 12U.S.C.§1842(d)(2)(A).Foradetaileddiscussionofthenationwidedepositcap,seeBankofAmerica Corporation/LaSalle,93FederalReserveBulletin109,109–110(2007);BankofAmericaCorporation/Fleet,90 FederalReserveBulletin217,219–220(2004). 8 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallsubsidiarybanksofthe companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.12U.S.C.§1841(o)(4)(C).Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders abanktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch. 12U.S.C.§§1841(o)(4)–(7),1842(d)(1)(A),and1842(d)(2)(B). 9 SeeN.C.G.S.§53-224.19(permittinginterstatemergeracquisitionsbutnotimposinganagerequirement).
202 FederalReserveBulletin|July2012 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthe publicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneeds of thecommunitytobeserved.10 TheBoardhasconsideredthecompetitiveeffectsof theproposalinlightof allthefactsof record.PNCBankandRBCBankcompetedirectlyintenlocalmarkets:Brevard,Daytona Beach,FortPierce,IndianRiver,Miami-FortLauderdale,Naples,Orlando,TampaBay, andWestPalmBeach,allinFlorida;andAtlanta,Georgia.TheBoardhasconsideredthe numberof competitorsthatwouldremaininthemarkets,therelativesharesof totaldepositsindepositoryinstitutionsinthemarketscontrolledbyPNCBankandRBCBank,the concentrationlevelsof marketdepositsandtheincreasesinthoselevelsasmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJGuidelines”),11andothercharacteristicsof the markets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJGuidelinesineachof thetenbankingmarkets.Onconsummationof theproposal,eightmarketswouldremainmoderatelyconcentratedandtwomarketswould remainunconcentrated,asmeasuredbytheHHI.Numerouscompetitorswouldremainin alltenmarkets.ThechangeintheHHI’smeasureof concentrationwouldbelessthan100 pointsinnineof thetenmarkets.InIndianRiver,thechangeintheHHI’smeasureof concentrationwouldbe184points,andthepost-mergerHHIwouldbe1477,whichiswithin thelimitsof theDOJGuidelines. TheDOJhasconductedadetailedreviewof thepotentialcompetitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof thetransactionwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinanyrelevantbankingmarketandthatcompetitiveconsiderationsareconsistentwithapproval. 10 12U.S.C.§1842(c)(1). 11 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywillnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points.The DOJhasstatedthatthehigher-than-normalHHIthresholdsforscreeningbankmergersandacquisitionsfor anticompetitiveeffectsimplicitlyrecognizethecompetitiveeffectsoflimited-purposeandothernondepository financialentities.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwere issuedin1995,werenotchanged.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html.
LegalDevelopments:FourthQuarter,2011 203 OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Theseare:thefinancialandmanagerialresources(includingconsiderationof thecompetence,experience,andintegrityof officers,directors,andprincipalshareholders)andfutureprospectsof thecompany andbanksconcerned;effectivenessof thecompanyincombattingmoneylaundering;the convenienceandneedsof thecommunitytobeserved;andtheextenttowhichtheproposalwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStates bankingorfinancialsystem.TheBoardhasconsideredallthesefactorsand,asdescribed below,hasdeterminedthatallconsiderationsareconsistentwithapprovalof theapplication.12Thereviewwasconductedinlightof allthefactsof record,includingsupervisory andexaminationinformationfromvariousU.S.bankingsupervisorsof theinstitutions involved,publiclyreportedandotherfinancialinformation,andinformationprovided byPNC. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarybanksandsignificantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoard evaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpactof theproposedfundingonthe transaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespecially important. TheBoardhasconsideredthefinancialfactorsof theproposal.PNCandPNCBankare wellcapitalizedandwouldremainsoonconsummationof theproposedacquisition.The proposedtransactionisstructuredasastockpurchaseof allthesharesof RBCBank(and therelatedcreditcardportfolioof RBC’sGeorgiabankaffiliate),foratotalpaymentof $3.6billion.Thepurchasewouldbefinancedwiththeproceedsfrom$1.0billionof noncumulativepreferredstock,$1.25billionof five-yearsubordinateddebtthatwasissuedinthe thirdquarterof 2011,andotheravailablecashresources.Althoughcapitalratioswould declineuponconsummation,PNCandPNCBankwouldhavecapitalratioswellabovethe establishedregulatoryminimums.Inaddition,PNChasbeenperformingcapitalstresstestingsincethesecondquarterof 2009.Underitsmostrecenttesting,PNCBankprojected thatitwouldbeabletomaintainabaselinetier1commonequityratioatalevelacceptable totheBoard.Assetqualityandearningsprospectsareconsistentwithapproval,andPNC appearstohaveadequateresourcestoabsorbthecostsof theproposalandtheproposed integrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoard findsthatPNChassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof PNC,PNCBank,andRBCBank,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddi- 12 Becauseeachfactorundersection3(c)wasindependentlyconsistentwithapprovalinthiscase,therewasno needfortheBoardtoconsiderweighingonefactoragainstothers.TheBoardnotesthatsection4,whichdeals withacquisitionsofnonbanksincludinginsureddepositoryinstitutionsthatarenotbanks,specificallyrequires aweighingofpublicbenefitsagainstadverseeffects.
204 FederalReserveBulletin|July2012 tion,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevant bankingsupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewith applicablebankinglaw,includinganti-money-launderinglaws. PNCandPNCBankareeachconsideredtobewellmanaged.PNChasademonstrated recordof successfullyintegratinglargeorganizationsintoitsoperationsandrisk-managementsystemsfollowingacquisitions,includingitsintegrationsof RiggsNationalCorporationin2005,MercantileBancsharesCorporationin2007,SterlingFinancialCorporation in2008,andNationalCityCorporation,aninstitutionof roughlyequalsizetoPNCatthe timeof itsacquisition,in2009.PNCisdevotingsignificantfinancialandotherresourcesto addressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.PNCwould implementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganizationthatareacceptablefromasupervisoryperspective.Inaddition,PNC’smanagement hastheexperienceandresourcestoensurethatthecombinedorganizationoperatesina safeandsoundmanner,andPNCisproposingtointegrateRBCBank’sexistingmanagementandpersonnelinamannerthataugmentsPNC’smanagement. PNC’sintegrationrecord,managerialandoperationalresources,andplansforoperating thecombinedinstitutionsafterconsummationprovideareasonablebasistoconcludethat managerialfactorsareconsistentwithapproval.Basedonallthefactsof record,theBoard hasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresourcesand futureprospectsof theorganizationsinvolvedareconsistentwithapproval. B.ConvenienceandNeedsConsiderations Undersection3,theBoardmustconsidertheeffectsof theproposalontheconvenience andneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).13The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,14andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.15 TheBoardhasconsideredtheconvenienceandneedsfactorandtheCRAperformance recordsof therelevantinsureddepositoryinstitutions.AsprovidedintheCRA,theBoard evaluatestherecordof performanceof aninstitutioninlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.16Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor.PNCBankreceivedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency,asof September30, 2009,andRBCBankreceiveda“satisfactory”ratingatitsmostrecentCRAperformance evaluationbytheFederalReserve,asof June21,2010.Moreover,thefactsof recorddonot reflectasubsequentdeclineintheCRAperformanceof thetwoinstitutionssincethose 13 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 14 12U.S.C.§2901(b). 15 12U.S.C.§2903. 16 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010).
LegalDevelopments:FourthQuarter,2011 205 examinations.TheBoardhasalsoreceived121commentsontheproposal,allinsupportof thetransaction,including104commentsfromcommunitygroups. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyPNC,andconfidential supervisoryinformation.PNCrepresentsthattheproposalwillbenefittheconvenienceand needsof thecommunitiescurrentlyservedbyRBCBankinseveralways.PNCintendsto offeritstreasurymanagement,capitalmarkets,andothercorporateservicestoRBC Bank’scorporateclientsandtoenhanceRBCBank’sconsumerproductswithPNChome mortgageloans,includingloansdesignedforthecreditneedsof LMIborrowers.Consummationof theproposalwouldprovideaccesstoalargerATMnetworktocurrentcustomersof PNCBankandRBCBank.PNCalsoplanstoextenditscommunitydevelopment activitiestothecommunitiescurrentlyservedbyRBCBank,offeringdepositandlending productsdesignedtoaddressthebankingneedsof LMIfamiliesandcommunities,community-basedorganizations,andsmallbusinesses.PNCintendstodeployteamsfromits communitydevelopmentbankinggroupintoareascurrentlyservedbyRBCBankto ensurethepromotionof communitydevelopmentlending,investment,andoutreach.These effortswouldincludemonetarygrantsandvolunteerservicessupportingschoolreadiness andHeadStartprogramsincommunitiesservedbyPNCBank;adedicatedteamfocusing onsmallbusinesslendingincertainLMIareas;andstrategicinvestmentsthroughacommunitydevelopmentsubsidiaryandspecializedNewMarketTaxCreditandLow-Income- HousingTaxCreditprogramsdesignedtofostersmallbusinessjobgrowthandaffordable-housingdevelopment.Theproposalwouldresultinincreasedgeographic diversificationthatcouldreducethecombinedcompany’sexposuretoregionaleconomic downturnsandthatcouldincreaseadministrativeefficiency,therebyprovidingindirectbenefitstocustomers.Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtotheconvenienceandneedsof thecommunitiestobeservedandtheCRA performancerecordsof therelevantdepositoryinstitutionsareconsistentwithapproval. C.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardalsotoconsider“theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancial system.”17Inanalyzingthisfactor,theBoardhasconsideredwhethertheproposalwould resultinamaterialincreaseinriskstofinancialstabilityduetotheincreaseinsizeof the combiningfirms,areductionintheavailabilityof substituteprovidersfortheservices offeredbythecombiningfirms,theextentof interconnectednessamongthecombining firmsandtherestof thefinancialsystem,theextenttowhichthecombiningfirmscontributetothecomplexityof thefinancialsystem,andtheextentof cross-borderactivitiesof thecombiningfirms.18TheBoardhasalsoconsideredtherelativedegreeof difficultyof 17 Section604(d)oftheDodd-FrankAct,Pub.L.No.111–203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). OtherprovisionsoftheDodd-FrankActimposeasimilarrequirementthattheBoardconsiderorweighthe riskstofinancialstabilityposedbyamerger,acquisition,orexpansionaryproposalbyafinancialinstitution. Seesections163,173,and604(e)and(f)oftheDodd-FrankAct.Aspecialprocesswasestablishedbythe Dodd-FrankActforrequiringthedivestitureofabusinessbyafinancialfirm.Section121oftheactprovides thattheBoardshallrequireafinancialfirmtodivestorterminateabusinessonlyiftheBoarddeterminesthat thecompany“posesagravethreattothefinancialstabilityoftheUnitedStates,”theFinancialStabilityOversightCouncil(“FSOC”)byavoteoftwo-thirdsofitsmembersapprovestherequirementtodivestorterminate thebusiness,andtheBoardhasdeterminedthatactionsotherthandivestitureorterminationofthebusiness areinadequatetomitigatethegravethreat.12U.S.C.§5331. 18 ThesecategoriescorrespondtothoseusedbytheBaselCommitteetoassessthesystemicimportanceofgloballyactivebankingorganizations.SeeBaselCommitteeofBankingSupervision,“Globalsystemicallyimportantbanks:assessmentmethodologyandtheadditionallossabsorbencyrequirement.Rulestext.”November2011.Thesecategoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.The
206 FederalReserveBulletin|July2012 resolvingthecombinedfirm.19TheBoardhasassessedthesefactorsindividuallyandin combinationandhasbaseditsassessmentonquantitativeanalysis,20usingpubliclyavailabledata,datacompiledthroughthesupervisoryprocess,anddataobtainedthroughinformationrequeststotheinstitutionsinvolvedintheproposal,aswellasonqualitativejudgments.21 Size.Anorganization’ssizeisoneimportantindicatorof therisktheorganizationposesto thefinancialsystem.Congresshasimposedaspecific10percentnationwidedepositlimit anda10percentnationwideliabilitieslimitonpotentialcombinationsbybankingorganizations.22Otherprovisionsof theDodd-FrankActimposespecialorenhancedsupervisory requirementsonlargebankingorganizations.23 TheBoardhasconsideredmeasuresof PNC’ssizerelativetotheUSFS,includingPNC’s consolidatedassets,itstotalleverageratioexposures,24anditsU.S.deposits.Asaresultof theproposedacquisition,PNCwouldbecomethe19thlargestUSFIbasedonassets,with $291billionor1.1percentof USFSassets.PNCwouldbecomethe16thlargestUSFI basedonleverageexposures,with$420billionor1.2percentof USFSleverageexposures. PNCalsowouldbecomethefifthlargestUSFIbasedonU.S.deposits,with$201billionor 2.2percentof totalU.S.deposits. BoardexpectstoissueanoticeofproposedrulemakingimplementingtheprovisionsoftheDodd-FrankAct thatrequiretheBoardtotakeintoaccountaproposal’simpactontheriskstothestabilityoftheU.S.financial orbankingsystem.Thepublicwouldhaveanopportunitythroughtherulemakingprocesstoprovidethe Boardwithviewsonhowitshouldtakethefinancialstabilityfactorintoaccountwhenreviewingapplications andnotices. 19 BlackrockisconsideredtobeasubsidiaryofPNCforpurposesoftheBHCAct.However,PNCownsonlya minorityofthesharesofBlackrock,andneitherGAAPnorpublicreportingrulesrequireBlackrocktobeconsolidatedintoPNC’sbalancesheet.PNC’sfinancialoperationsarenotintegratedwiththoseofBlackrock,and otheroperationaltiesbetweenthetwoarerelativelylimited.Basedontheseandotherfactsofrecord,the BoardhastreatedBlackrockasanequityinvestmentofPNCforpurposesofthefinancialstabilityanalysis. Thisanalysismightchangeiffactsregardingtheirrelationshipchange;forexample,ifPNCweretoincreaseits stakeinBlackrockorestablishmoresignificantoperationallinkageswithBlackrock.PNCwouldrequireBoard approvalundersection163(b)oftheDodd-FrankActtoincreaseitsinvestmentinBlackrock,whichwould requireareviewofwhetherthetransactionwouldresultin“greaterormoreconcentratedriskstothestability oftheUnitedStatesbankingorfinancialsystem.”Section163(b)oftheDodd-FrankAct,Pub.L.No.111– 203,124Stat.1376,codifiedat12U.S.C.§5363. 20 MuchofthedataconsideredbytheBoardrepresentmeasuresofaninstitution’sactivitiesrelativetotheU.S. financialsystem(“USFS”).Forthispurpose,theUSFScomprisesallU.S.financialinstitutions(“USFIs”)used incomputingtotalliabilitiesforpurposesofcalculatingthelimitationonliabilitiesofafinancialcompany requiredundersection622oftheDodd-FrankActandincludesU.S.-basedbankandnonbankaffiliatesof foreignbankingorganizations.Inconnectionwithitssupervisionofnonbankfinancialinstitutionsthat theFSOCdeterminescouldposeathreattothefinancialstabilityoftheUnitedStates,theBoardmayrequire financialandotherreportingbytheseinstitutions,whichwouldincreasethepoolofavailabledataforfinancial stabilityanalyses.Seesections113and151oftheDodd-FrankAct,codifiedat12U.S.C.§§5323and5341, respectively. 21 Indevelopingthefinancialstabilityanalysisusedinthisproposal,theBoardhastakenintoconsideration relatedBoardinitiativesonfinancialstabilitytotheextentappropriate,suchasproposalstosetcapitalsurchargesforglobalsystemicallyimportantfinancialinstitutionsandtoidentifynonbanksystemicallyimportant financialinstitutions.TheBoardrecognizesthatamergeranalysisisuniqueinfinancialstabilityreviews becauseitfocusesonpreventingtheformationofaninstitutionthatposessignificantriskstofinancialstability ratherthanregulatinganexistinginstitutionthatposessimilarrisks.Accordingly,thestabilityframeworkfora mergeranalysismayoverlapwith,butnotbeidenticalto,theframeworkassociatedwiththeotherstability initiatives. 22 12U.S.C.§§1842(d)and1852.Seealsosection623oftheDodd-FrankAct,codifiedat12U.S.C.§1852. 23 Section165oftheDodd-FrankAct,codifiedat12U.S.C.§5365,requirestheBoardtosubjectallbankholdingcompanieswithtotalconsolidatedassetsof$50billionormoreandanynonbankfinancialcompanydesignatedbytheFSOCforsupervisionbytheBoardtoenhancedprudentialstandards,inordertopreventor mitigateriskstothefinancialstabilityoftheUnitedStatesthatcouldarisefromthematerialdistressorfailure ofthesefirms. 24 Totalleverageexposureiscalculatedinamannerroughlyequivalenttothemethodologysetoutin“BaselIII:A globalregulatoryframeworkformoreresilientbanksandbankingsystems”andtakesintoaccountbothonandoff-balance-sheetassets.
LegalDevelopments:FourthQuarter,2011 207 Thesemeasuressuggestthat,althoughthecombinedorganizationwouldbelargeonan absolutebasis,PNCwouldhaveonlyamodestshareof USFSassets,leverageexposures, andU.S.deposits.PNCalsoissignificantlysmallerthanthelargestUSFIs.ThreeUSFIs eachwouldhavebetweensixandeighttimestheassetsof PNC,andsevenotherinstitutionswouldhaveatleasttwicetheassetsof PNC.PNC’sshareof andrankinU.S.deposits,2.2percentandfifth,respectively,arehigherthantheothermeasuresof itssizebecause PNCisprimarilyengagedincommercialbankingactivities,whichisnotthecasewith manyof thelargestUSFIs.PNC’sdepositsharewouldnonethelessberelativelymodest. TherearethreeUSFIsthatwouldeachhavebetween3.5and5timestheU.S.depositsof PNCandthreeinstitutionsthatwouldeachhavebetween0.9and1.5timestheU.S.depositsof PNC.PNC’soverallnationalmarketsharefordepositsof approximately2.2percent anditsmarketshareof nationalliabilitiesof approximately1.4percentarebothwellbelow the10percentlimitssetbyCongress.25 BothPNCandRBCBankengageinarelativelytraditionalsetof commercialbanking activities,andtheincreasedsizeof thecombinedorganizationwouldnotincreasethedifficultyof resolvingtheorganization’sactivities.Accordingly,althoughtheproposedtransactionswouldincreasePNC’soverallsize,anditsrankingtothefifthlargestbankinthe UnitedStatesbasedonU.S.deposits,itslargersizealonewouldnotresultinmaterially greaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancial system. Measuresof afinancialinstitution’ssizeonaproformabasiscouldeitherunderstateor overstateriskstofinancialstabilityposedbythefinancialinstitution.Forinstance,arelativelysmallinstitutionthatoperatesinacriticalmarketforwhichthereisnosubstituteproviderorthatcouldtransmititsfinancialdistresstootherfinancialorganizationsthrough multiplechannels,couldpresentmaterialriskstothestabilityof theUSFS.Conversely,an institutionthatisrelativelylargecouldengageinactivitiesthatarenotcomplexforwhich thereareseveralsubstituteprovidersintheeventof failureorseverefinancialdistressand, accordingly,maypresentonlylimitedriskstoU.S.financialstability. PNC’ssizedoesnotrisetothelevelwhentheBoardwouldbeinclined,solelyonthatbasis, torestrictitsabilitytomakea$27billionacquisition.Accordingly,theBoardhasconsideredotherfactors,bothindividuallyandincombinationwithsize,toevaluatethelikely impactof thistransactiononfinancialstability. Substitutability.TheBoardhasexaminedwhetherPNCorRBCBankengagesinany activitiesthatarecriticaltothefunctioningof theUSFSandwhethersubstituteproviders wouldremainthatcouldquicklystepintoperformsuchactivitiesshouldthecombined entitysuddenlybeunabletodosoasaresultof severefinancialdistress. PNCandRBCBankbothprovidebusinessandconsumercredit.RBCBankhasademinimismarketshare(lessthan1percent)inavarietyof business-andconsumercredit-related activitiesthattheBoardhasconsidered.AlthoughPNChasalargershareinsomeof these markets,numerousotherUSFIsprovidebusinessandconsumercredit,andthetransaction doesnotcreate,solidify,ormaintainthepositionof asingleentitythatislikelytoposean unacceptablerisktoU.S.financialstability.TheBoardalsoconsideredanumberof critical activitiesthatareperformedeitherbyPNCorRBCBank(butnotbyboth)andinnocase wouldthecombinedentityprovideaserviceforwhichmanysubstituteproviderscouldnot bereadilyidentified. 25 Inthiscontext,liabilitieshavebeencomputedunderthelimitationsonconsolidatedliabilitiesofsection622of theDodd-FrankAct,codifiedat12U.S.C.§1852.
208 FederalReserveBulletin|July2012 Interconnectedness.TheBoardhasexamineddatatodeterminewhetherfinancialdistress experiencedbythemergedentitycouldcreatefinancialinstabilitybybeingtransmittedto otherinstitutionsormarketswithintheU.S.financialorbankingsystem.Inparticular,the Boardhasconsideredwhetherthecombinedentity’srelationshipstoothermarketparticipantsandthesimilarityof productofferingscouldtransmitmaterialfinancialdistress experiencedbythecombinedentitytoitscounterpartiesdirectly,transmitsuchdistress indirectlythroughafiresaleof assetsorerosionof assetprices,ortriggercontagionresultinginthewithdrawalof liquidityfromotherfinancialinstitutions.26 PNCdoesnotcurrentlyengage,andasaresultof thistransactionwouldnotengageinthe future,inbusinessactivitiesorparticipateinmarketstoadegreethatintheeventof financialdistressof thecombinedentity,wouldposematerialrisktootherinstitutions.Thepro formamergedentity’sexpecteduseof wholesalefundingislowerrelativetoallUSFIsthan isitscorrespondingshareof consolidatedassets.Onaproformabasis,thetransactionalso wouldnotconcentrateexposuretoanysinglecounterpartythatwasamongthetopthree counterpartiesof eitherPNCorRBCBankbeforethemerger.Therecorddoesnotshow otherevidencethattheproformacombinedentitywouldbesointerconnectedwithmarketsandinstitutionsintheU.S.financialorbankingsystemastomakeitlikelythatthe combinedentitywouldtransmitfinancialdistresstoothermarketparticipantsortothe marketgenerallyinamannerortoadegreethatwouldcausematerialriskstotheU.S. financialorbankingsystem.AlthoughdistressinalargeinstitutionsuchasPNCcould clearlyhaveaneffectonothermarketparticipants,thateffectwouldnotappeartobeso adverseastohaveamaterialimpactonmarketstability. Complexity.TheBoardhasconsideredtheextenttowhichtheproformaentitycontributes totheoverallcomplexityof theUSFS.Theproformaentity’sshareof complexassetsin theaggregateUSFSappearstobelargelyconsistentwithitscorrespondingshareof consolidatedassets.TheBoardalsohasconsideredwhetherthecomplexityof theproforma entity’sassetsandliabilitieswouldhinderitstimelyandefficientresolutionintheeventit weretoexperiencefinancialdistress.PNCandRBCBankdonotengageincomplexactivities,suchasservingasacoreclearingandsettlementorganizationforcriticalfinancialmarkets,thatmightcomplicatetheresolutionprocessbyincreasingthecomplexity,costs,or timeframesinvolvedinaresolution.Underthesecircumstances,resolvingtheproforma organizationwouldnotappeartoinvolvealevelof cost,time,ordifficultysuchthatit wouldcauseamaterialincreaseinriskstothestabilityof theUSFS.27 Cross-borderactivity.TheBoardhasexaminedthecross-borderactivitiesof PNCand RBCBanktodeterminewhetherthecross-borderpresenceof thecombinedorganization wouldcreatedifficultiesincoordinatingaresolution,therebymateriallyincreasingtherisks toU.S.financialstability.PNChasseveralindirectsubsidiariesoutsidetheUnitedStates, andPNCBankoperatesbranchesinToronto,Canada,andNassau,TheBahamas.RBC Bank’scross-borderactivitiesarelimitedtoabranchinGeorgetown,CaymanIslands.28 Thecombinedorganizationisnotexpectedtoengageinanyadditionalactivitiesoutside theUnitedStatesasaresultof theproposedtransaction.Inaddition,thecombinedorganizationwouldnotengageincriticalserviceswhosedisruptionwouldimpactthemacroeco- 26 Thesourceofthecontagioncouldincludeabeliefonthepartofmarketparticipantsthataparticularinstitutionisrelatedtothemergedentitybecauseithasasimilarbusinessmodelorriskprofile,orbecausetheinstitutionisthoughttohavecounterpartyexposurestothemergedentity. 27 Asnotedpreviously,theDodd-FrankActrequiresbankholdingcompanieslikePNCthatholdmorethan $50billionintotalconsolidatedassetstosubmitresolutionplans,whichareintendedtoassistaninstitutionin managingitsrisksandplanforarapidandorderlyresolutionintheeventofmaterialdistressorfailureandto enabletheregulatorstounderstandaninstitution’scomplexity.See12U.S.C.§5365. 28 OnconsummationofthemergerofPNCBankandRBCBank,PNCintendstotransferallassetsandliabilitiesoftheCaymanBranchtoPNCBank’sbranchinNassau,TheBahamas,andtoclosetheCaymanBranch.
LegalDevelopments:FourthQuarter,2011 209 nomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreaseddifficultiesfortheresolutionprocess.Basedonthisreview,theBoardconsidersthatthecrossborderpresenceof theconsolidatedorganizationwouldnotresultinamaterialincreasein riskstothestabilityof theU.S.financialorbankingsystem. Financialstabilityfactorsincombination.TheBoardhasassessedtheforegoingfactorsin combinationtodeterminewhetherinteractionsamongthemmightmitigateorexacerbate riskssuggestedbylookingatthemindividually.TheBoardalsohasconsideredwhetherthe proposedtransactionwouldprovideanystabilitybenefitsandwhetherenhancedprudential standardsapplicabletothecombinedorganizationwouldtendtooffsetanypotential risks.29 Forinstance,concernsregardingPNC’ssizewouldbegreaterif PNCwerealsohighly interconnectedtomanydifferentsegmentsof theUSFSthroughitscounterpartyrelationships,participationinshort-termfundingandcapitalmarkets,orotherchannels.The Board’slevelof concernaboutitssizewouldalsobegreaterif thestructureandactivities of PNCweresufficientlycomplexthat,if PNCweretofail,itwouldbedifficulttoresolve itsfailurequicklywithoutcausingsignificantdisruptionstootherfinancialinstitutionsor markets. Asdiscussedabove,thecombinedentitywouldnotbehighlyinterconnected.Furthermore, theorganizationalstructureandoperationalregimeof thecombinedorganizationwouldbe centeredonacommercialbankingbusiness,andtheresolutionprocesswouldbehandled inapredictablemannerbytheFederalDepositInsuranceCorporation.TheBoardhasalso consideredothermeasuresthataresuggestiveof thedegreeof difficultywithwhichPNC couldberesolvedintheeventof afailure.ThesemeasuressuggestthatPNCwouldbesignificantlymorestraightforwardtoresolvethanlargeuniversalbanksorlargeinvestment banks. Basedontheseandalltheotherfactsof record,theBoardhasconcludedthattheproposal wouldnotmateriallyincreaseriskstothestabilityof theU.S.financialorbankingsystem. Accordingly,theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityare consistentwithapproval. D.ConclusiononSection3(c)Factors Asdescribedabove,theBoardhasconsideredthefinancialandmanagerialresourcesand futureprospectsof thecompaniesandbanksconcerned;effectivenessof thecompaniesin combattingmoneylaundering;theconvenienceandneedsof thecommunitytobeserved; andtheextenttowhichtheproposalwouldresultingreaterormoreconcentratedrisksto thestabilityof theUnitedStatesbankingorfinancialsystem.Basedonallthefactsof record,includingthosedescribedabove,theBoardhasdeterminedthatallof thefactors areconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardapprovedtheproposaleffectiveDecember19,2011.Inreachingitsconclusion,theBoardhasconsideredallthefacts of recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCActandother applicablestatutes.TheBoard’sapprovalisspecificallyconditionedoncomplianceby PNC,PNCBancorp,andPNCBankwithallthecommitmentsmadetoandreliedonby 29 Section165oftheDodd-FrankAct,Pub.L.No.111–203,124Stat.1376,codifiedat12U.S.C.§5365.
210 FederalReserveBulletin|July2012 theBoardinconnectionwiththeapplicationandonreceiptof allotherregulatoryapprovals.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. TheproposalmaynotbeconsummatedbeforethefifteenthcalendardayafterDecember19,2011,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Cleveland,actingpursuanttodelegated authority. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. December23,2011 RobertdeV.Frierson DeputySecretaryof theBoard Order Issued Under Section 4 of the Bank Holding Company Act Westpac Banking Corporation Sydney, Australia OrderApprovingNoticetoEngageinNonbankingActivities WestpacBankingCorporation(“Westpac”),Sydney,Australia,aforeignbankingorganizationsubjecttotheprovisionsof theBankHoldingCompanyAct(“BHCAct”),has requestedtheBoard’sapprovalundersections4(c)(8)and4(j)of theBHCActandsection225.24of theBoard’sRegulationY1toengageincertainnonbankingactivities throughtheacquisitionof allthevotingsharesof JOHCM(USA)GeneralPartnerInc. (“JOHCMUSA”),Wilmington,Delaware,anditsforeignparentcompany,JOHambro CapitalManagementLimited(“JOHCM”),London,England.JOHCMandJOHCM USAwouldbeacquiredthroughWestpac’ssubsidiary,BTInvestmentManagementLimited(“BTIM”),Sydney,andBTIM’swhollyownedsubsidiary,BTIMUKLimited,London.Asaresultof theacquisition,WestpacanditssubsidiarieswouldengageintheUnited Statesinthefollowingactivities: 1. providingfinancialandinvestmentadvisoryservices,inaccordancewithsection225.28(b)(6)of RegulationY;2 2. providingprivateplacementservices,inaccordancewithsection225.28(b)(7)of RegulationY;3and 3. actingasthegeneralpartnerforprivateinvestmentlimitedpartnershipsthatinvestin assetsinwhichabankholdingcompanyispermittedtoinvest. Noticeof theproposal,affordinginterestedpersonsanopportunitytocomment,hasbeen publishedintheFederalRegister(76FederalRegister46,808(2011)).Thetimeforfiling commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection4of theBHCAct. Westpac,withtotalassetsof approximately$644billion,isthethirdlargestbankinAustraliabyassetsizeandengagesinabroadrangeof bankingandfinancialservicesthroughout 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 2 12CFR225.28(b)(6). 3 12CFR225.28(b)(7).
LegalDevelopments:FourthQuarter,2011 211 Australia,NewZealand,andtheSouthPacificregion.4Westpacoperatesafederalbranch, withtotalconsolidatedassetsof $25.5billion,inNewYork,NewYork,andengagesin investmentadvisoryactivitiesintheUnitedStatesthroughitssubsidiary,HastingsFunds Management(USA),SanAntonio,Texas. JOHCM,withapproximately$11billioninassetsundermanagement,isanequityinvestmentmanagementfirmregisteredwiththeSecuritiesandExchangeCommission(“SEC”) undertheInvestmentAdvisorsActof 1940.JOHCMUSAservesasthegeneralpartnerto aprivatefund,theJOHCMInternationalSelectFund(“theFund”),Wilmington,Delaware,alimitedpartnershipthatinvestsinaportfolioof publiclytradedinternationalequity securities.5JOHCMUSAprivatelyplaceslimitedpartnershipinterestsintheFundwith accreditedinvestors,asdefinedunderSECrules.6Inaddition,JOHCMUSAhasretained JOHCMtoprovideinvestmentadvicetotheFund.7 TheBoardpreviouslyhasdeterminedbyregulationthatfinancialandinvestmentadvisory activitiesandprivateplacementactivitiesarecloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.8Inaddition,theBoardpreviouslyhasdeterminedbyorder thatprivateinvestmentlimitedpartnershipactivitiesarepermissibleforbankholdingcompanieswhenconductedwithincertainlimits.9Westpachascommittedthatitwillconduct theactivitiesof JOHCMandJOHCMUSAinaccordancewiththelimitationssetforthin RegulationYandtheBoard’sordersandinterpretationsrelatingtoeachof theproposed activities. Section619of theDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”),whichprohibitsabankingentityfrom“acquir[ing]orretain[ing]anyequity, partnership,orotherownershipinterestinorsponsor[ing]ahedgefundorprivateequity fund,”10mayrestricttheactivitiesinwhichWestpacproposestoengage.TheBoardand otherfederalregulatoryagenciesrecentlyrequestedpubliccommentonaproposedregulationtoimplementsection619of theDodd-FrankAct.11Theregulationhasnotbeenfinalizedand,accordingly,theBoardexpressesnoviewonwhethertheproposedactivities wouldbepermissibleforWestpactoconductaftertheeffectivedateof anyfinalrulethe Boardmayadopt.Westpachascommittedthatitwillconformitsactivitiestocomplywith thefinalrulewithinthedeadlineestablishedforcompliancewithsection619of theDodd- FrankAct. Toapprovetheproposal,theBoardisrequiredbysection4(j)(2)(A)of theBHCActto determinethattheproposedacquisitionof JOHCMUSAandtheconductof activitiesin theUnitedStatesbyJOHCM“canreasonablybeexpectedtoproducebenefitstothepublicthatoutweighpossibleadverseeffects,suchasundueconcentrationof resources, decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisk tothestabilityof theUnitedStatesbankingorfinancialsystem.”12Aspartof itsevalua- 4 AssetandrankingdataareasofMarch31,2011. 5 TheFundisexemptfromregistrationwiththeSECundersection3(c)(1)oftheInvestmentCompanyActof 1940.15U.S.C.§80a-3(c)(1). 6 SECRegulationD,17CFR230.501. 7 Currently,theFundistheonlyU.S.limitedpartnershipforwhichJOHCMUSAservesasthegeneralpartner andplaceslimitedpartnershipinterests.Westpacproposestoconducttheseactivitiesforsimilarlimitedpartnershipsthatmightbeestablishedinthefuture. 8 12CFR225.28(b)(6),(7). 9 SeeDresdnerBankAG,84FederalReserveBulletin361(1998);MeridianBancorp,Inc.,80FederalReserveBulletin736(1994). 10 Pub.L.No.111–203,124Stat.1376,1620(2010). 11 Seewww.federalreserve.gov/newsevents/press/bcreg/20111011a.htm. 12 12U.S.C.§1843(j)(2)(A)
212 FederalReserveBulletin|July2012 tionof aproposalunderthesepublicinterestfactors,theBoardreviewsthefinancialand managerialresourcesof thecompaniesinvolved,theeffectof theproposaloncompetition intherelevantmarkets,andthepublicbenefitsof theproposal.13 FinancialandManagerialResources Inreviewingtheproposalundersection4of theBHCAct,theBoardhasconsideredthe financialandmanagerialresourcesof thecompaniesinvolvedandtheeffectof theproposalonthoseresources.TheBoardhasconsidered,amongotherthings,confidential reportsof examination,informationprovidedbyWestpac,andpubliclyreportedandother financialinformationinassessingthefinancialandmanagerialstrengthof Westpac. Inevaluatingthefinancialfactorsof thisproposal,theBoardhasconsideredanumberof factors,includingcapitaladequacyandearningsperformance.Westpac’scapitalratios exceedtheminimumlevelsthatwouldberequiredbytheBaselCapitalAccordandareconsideredequivalenttothecapitalthatwouldberequiredof aU.S.bankingorganization. Moreover,consummationof thisproposalwouldnothaveasignificantimpactonthe financialconditionof Westpac.Basedonitsreview,theBoardfindsthatWestpachassufficientfinancialresourcestoeffecttheproposal. Inaddition,theBoardhascarefullyconsideredthemanagerialresourcesof Westpac,the supervisoryexperiencesof otherbankingsupervisoryagencieswithWestpac,andWestpac’srecordof compliancewithapplicableU.S.bankinglaws.TheBoardhasalsoreviewed reportsof examinationfromtheappropriatefederalsupervisorsof theU.S.operationsof Westpacthatassesseditsmanagerialresources.Basedonallthefactsof record,theBoard hasconcludedthatthefinancialandmanagerialresourcesof theorganizationsinvolvedin theproposalareconsistentwithapproval. CompetitiveConsiderationsandFinancialStability TheBoardhascarefullyconsideredthecompetitiveeffectsof theproposal.Thereare numerousexistingandpotentialcompetitorsintheindustriesfortherelevantnonbanking activities.Inaddition,themarketsfortheproposedservicesareregionalornationalin scope.Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposalwouldhavenosignificantlyadversecompetitiveeffectsinanyrelevantmarket. TheBoardhasalsocarefullyconsideredinformationrelevanttoriskstothestabilityof the UnitedStatesbankingandfinancialsystems.Specifically,theBoardhasconsidered whethertheproposalwouldresultinamaterialincreaseinriskstofinancialstabilitydueto anincreaseinthesizeof theacquirer,areductionintheavailabilityof substituteproviders of criticalfinancialproductsorservices,oranincreaseintheextentof theinterconnectednessof thefinancialsystem.Consummationof thisproposalwouldnotresultinasignificantdecreaseintheavailabilityof substituteprovidersof criticalfinancialservicesorasignificantincreaseinthesizeof Westpacandwouldnotresultinasignificantincreaseinthe interconnectednessof thefinancialsystem.Basedontheseandotherfactors,theBoard concludesthatfinancialstabilityconsiderationsinthisproposalareconsistentwith approval. 13 See12CFR225.26;see,e.g.,BancOneCorporation,83FederalReserveBulletin602(1997).
LegalDevelopments:FourthQuarter,2011 213 PublicBenefits Aspartof itsevaluationof thepublicinterestfactorsundersection4of theBHCAct,the Boardhasreviewedcarefullythepublicbenefitsandpossibleadverseeffectsof theproposal.Therecordindicatesthatconsummationof theproposalwouldresultinbenefitsto thepublicbyenhancingWestpac’sabilitytoserveitscustomers. Forthereasonsdiscussedaboveandbasedonallthefactsof record,theBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithintheframeworkof RegulationYandBoardprecedentisnotlikelytoresultinsignificantlyadverseeffects, suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingor financialsystem.Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalcanreasonablybeexpectedtoproducepublicbenefitsthatwould outweighanylikelyadverseeffects.Accordingly,theBoardhasdeterminedthatthebalance of thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistent withapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe noticeshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyWestpacwith theconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwiththenotice.TheBoard’sapprovalisalsosubjecttotheconditionssetforthin RegulationY,includingthoseinsections225.7and225.25(c),14andtotheBoard’sauthoritytorequiresuchmodificationorterminationof theactivitiesof Westpacoranyof its subsidiariesastheBoardfindsnecessarytoensurecompliancewith,andtopreventevasion of,theprovisionsof theBHCActandtheBoard’sregulationsandordersissuedthereunder.Forpurposesof thisaction,theseconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorderof theBoardof Governors,effectiveOctober24,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDukeand Tarullo.Absentandnotvoting:GovernorRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Order Issued Under Sections 3 and 4 of the Bank Holding Company Act Green Dot Corporation Monrovia, California OrderApprovingtheFormationof aBankHoldingCompany GreenDotCorporation(“GreenDot”),Monrovia,California,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyActof 1956,asamended(“BHC 14 12CFR225.7and225.25(c)
214 FederalReserveBulletin|July2012 Act”),1toacquireBonnevilleBancorp(“Bonneville”)andtherebyindirectlyacquireBonneville’swhollyownedsubsidiarybank,BonnevilleBank(“Bank”),bothof Provo,Utah.2 GreenDotandBonnevillealsohavefiledwiththeBoardelectionstobecomefinancial holdingcompaniesonconsummationof theproposalpursuanttosections4(k)and(l)of theBHCActandsection225.82of theBoard’sRegulationY.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(75FederalRegister7598(February22,2010)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheproposalinlightof thefactorsset forthinsection3of theBHCAct. GreenDot,withtotalconsolidatedassetsof approximately$322million,providesbank-issued,general-purposereloadableprepaiddebitcards(“GPRcards”)4andprovidessettlementservicesforprepaiddebitcards.GreenDot’sGPRcardsarenetworkbrandedandare linkedtopooledaccountsthatareheldatdepositoryinstitutionsandinsuredbytheFederalDepositInsuranceCorporation(“FDIC”).GreenDotsellsitsGPRcardsthrough nationalretailchainsandontheInternet.5GreenDot’sGPRcardscurrentlyareissuedby third-partybanksthatmaintainaccountsonbehalf of GreenDot’scustomers. GreenDotproposesthatGreenDotBankissueGreenDotGPRcardslinkedtoFDIC-insuredaccountsandprovidesettlementservices.6GreenDotBank’ssettlementservices wouldincludecollectingfundsgeneratedfromsalesof GreenDotGPRcardsandrelated products,distributingfundstoissuingbanksforcardsservicedbyGreenDot,anddistributingfundstootherbanksforGreenDotNetwork7acceptancepartners.GreenDotwould provideadministrativeservicestoGreenDotBank,suchashumanresources,accounting andtax,marketing,andinformationtechnology,andinfrastructureservicesunderanintercompanyserviceagreement.8GreenDotdoesnotproposetoengageinotheractivitiesto anysignificantextent. Bank,withtotalassetsof approximately$35.7million,isthe60thlargestinsureddepositoryinstitutioninUtah,controllingdepositsof approximately$29.6million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutions inthestate.9Onconsummationof theproposal,nocompanywouldown10percentor moreof GreenDot’sshares. 1 12U.S.C.§1842. 2 BonnevilleandBankwouldberenamedGreenDotBancorpandGreenDotBankonconsummationofthe proposal. 3 12U.S.C.§§1843(k)and(l);12CFR225.82. 4 GreenDotalsooffersprivate-labelprogramstoretailers. 5 AlargemajorityofGreenDot’sGPRcardsaresoldthroughasingleretailchain.Thestructureofthecurrent agreementbetweentheretailchainandGreenDotappearsdesignedtoencouragethepartiestocontinuetheir businessrelationshipandmorecloselyalignthefinancialinterestsofthetwocompanies. 6 GreenDotexpectstocompletethetransferofitsGPRcardoperationswithintwelvetoeighteenmonthsafter consummationoftheproposedtransaction.Bankwouldretainitsexistingassetsandliabilitiesandwouldcontinuetoengageincurrentlendingactivitiesaswellasprepaidcardactivities. 7 GreenDotNetworkisascalabletechnologyplatformandpaymentsnetworkthatsupportscardsales,purchases,andreloadingservicestocardholders,retailers,andissuingbanks. 8 Theprovisionofsuchservicesmustcomplywiththerestrictionsofsections23Aand23BoftheFederal ReserveActandtheBoard’sRegulationWonaffiliatetransactions.12U.S.C.§§371c,371c-1;12CFR part223. 9 AssetdataareasofJune30,2011.DepositandrankingdataareasofJune30,2011,andreflectmergeractivitythroughthatdate.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks, andsavingsassociations.
LegalDevelopments:FourthQuarter,2011 215 CompetitiveConsiderations TheBoardhasconsideredcarefullythecompetitiveeffectsof theproposalinlightof allthe factsof therecord.Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anyattemptto monopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalso prohibitstheBoardfromapprovingaproposedbankacquisitionthatwouldsubstantially lessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof the proposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposal inmeetingtheconvenienceandneedsof thecommunitytobeserved.10 GreenDotdoesnotcurrentlycontroladepositoryinstitution.Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof bankingresourcesin anyrelevantbankingmarketandthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andSupervisoryConsiderationsandFutureProspects Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalandcertainothersupervisoryfactors.11TheBoardhasconsideredthosefactorsin lightof allthefactsof record,includingsupervisoryandexaminationinformationreceived fromtherelevantfederalandstatesupervisorsof theorganizationsinvolved,andpublicly reportedandotheravailablefinancialinformation,includinginformationprovidedby GreenDot.Inaddition,theBoardhasconsultedwiththestateandprimaryfederalsupervisorsof Bank.TheUtahDepartmentof FinancialInstitutions(“UtahDFI”)andFDIC havenotobjectedtoGreenDot’sproposal.TheBoardhasconsideredtheBHCActfactors andrelatedinformationinlightof GreenDot’sproposalthatGreenDotBank’soperations wouldbesubstantiallyfocusedontheprepaidcardbusiness. Inevaluatingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacyto beanespeciallyimportantaspect.GreenDot,Bonneville,andBankarewellcapitalized.In addition,GreenDotwouldmakeaninitialcashinjectionof $13.6millioninBankfrom cashonhandandwouldmaintainatier1leverageratioof atleast15percentatGreenDot Bankforfiveyearsafterconsummation.GreenDothasnolong-termdebt.TheBoardhas consultedwiththeFDICandUtahDFIregardingtheserequiredcapitallevels.GreenDot wouldremainwellcapitalizedonconsummationof theproposal.Inconnectionwiththe proposaltoissueitsGPRcardsthroughandsettleitsGPRcardtransactionsatGreenDot Bank,GreenDothascommittedtomaintain,atGreenDotand/orGreenDotBank,cash and/orcashequivalentsequaltotheamountof insureddepositsatGreenDotBankgeneratedthroughitsGPRcardoperations.TheBoardalsohastakenintoaccountGreenDot’s recordof offeringGPRcardstothepublic,thecompany’sfinancialstrength,andthecompany’sabilitytoserveasasourceof strengthtoGreenDotBank.TheBoardhasreviewed GreenDot’soperatingplanforGreenDotBankandGreenDot’sprojectionsthatGreen DotandGreenDotBankwouldbeabletoremainwell-capitalizedandprofitableeven undercertainstressscenariosthatcouldnegativelyaffecttheprepaidcardoperationsthat wouldbeconductedatGreenDotandGreenDotBank. 10 12U.S.C.§1842(c)(1). 11 12U.S.C.§1842(c)(2)and(3).
216 FederalReserveBulletin|July2012 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BonnevilleandBankandhasconductedinspectionsof GreenDot,12includingassessmentsof itscurrentmanagement,risk-managementsystems,andoperations.TheBoard alsohasconsideredthesupervisoryexperienceof theotherrelevantbankingagencieswith theorganizations,includingtheirrecordsof compliancewithapplicablebankingand anti-money-launderinglaws.13Inaddition,theBoardhasconsideredGreenDot’splansfor implementingtheproposalandfortheproposedmanagementof theorganizations involvedafterconsummation.Moreover,theBoardhasconsideredinformationregarding GreenDot’senterprise-widerisk-managementprogramcollectedbyexaminerswiththe FederalReserve,FDIC,andUtahDFI.TheBoardhasalsoconsideredthatGreenDothas retainedmanagementwithsignificantexperienceintheprepaidcardindustryaswellas managementexperiencedincommercialandcommunitybanking. Inaddition,theBoardhasconsideredthefutureprospectsof GreenDot,Bonneville,and Bankinlightof thefinancialandmanagerialresourcesandtheproposedbusinessplan.As noted,GreenDotBank’sbusinessactivitywouldbefocusednarrowlyontheissuanceof GPRcards.Abusinessplanthatfocusesonanarrowbusinessactivity14anddependsona limitednumberof keybusinesspartnerscarriessignificantlygreaterrisksthanabusiness planthatemploysbroaddiversificationof activitiesandcounterparties.TheBoardexpects bankingorganizationswithanarrowfocustoaddresstheseincreasedriskswithfinancial resources,managerialsystems,andexpertisecommensuratewiththatadditionallevelof risk.Inthiscase,theBoardhasreliedonthesignificantlevelof capitalthatGreenDotand itsbankwillhaveonconsummationandGreenDot’scommitmenttomaintainGreenDot Bankaswellcapitalizedwithatier1leverageratioof atleast15percentforfiveyearsafter consummation.Thiscapitalleveliswellinexcessof thetier1leveragerationeededtobe consideredwellcapitalizedbutisappropriateinlightof thesinglefocusof GreenDotand GreenDotBank’sactivity.GreenDothascommittedthatGreenDotBankwillnotpay dividendsforthreeyearsafterconsummationof theproposal.TheBoardhasalsoconsideredthatGreenDotBank’sprimarysourceof depositswouldbethefundsassociatedwith GPRcardspurchasedbyindividuals,whichGreenDothascommittedtobalancewith equallevelsof cashorcashequivalents.Inaddition,theBoardhasconsideredGreenDot’s enterprise-widerisk-managementprogramandGreenDot’sretentionof managementwith significantexperienceintheprepaidcardindustryaswellasmanagementexperiencedin commercialandcommunitybanking. Onthisbasis,includingthecommitmentsmadebyGreenDottotheBoard,theBoardhas concludedthatconsiderationsrelatingtothefinancialandmanagerialresourcesandfuture prospectsinvolvedintheproposalareconsistentwithapproval,asaretheothersupervisory factors. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardalsomustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand 12 TheFederalReserveBankofSanFrancisco,FDIC,andUtahDFIconductedon-sitereviewsofGreenDot’s operationsinconnectionwiththeproposal. 13 GreenDotiscurrentlyregisteredwiththeUnitedStatesTreasuryDepartment’sFinancialCrimesEnforcement NetworkasaMoneyServiceBusinessandfilesSuspiciousActivityReportsandCurrencyTransactionReports. 14 GreenDothascommittedtobalanceGreenDotBank’sGPRcarddepositswithequallevelsofcashorcash equivalentsatGreenDotorGreenDotBank.Accordingly,theproposaldoesnotappeartopresentincreased creditriskassociatedwithnarrowlyfocusedbusinessplansthataredependentononeassetcategory,suchasa particulartypeoflending.Asdiscussedbelow,theBoardhasconsideredtherisksposedbyGreenDot’sbusinessplaninlightofitsproposaltomitigatesuchrisks,includingitscommitments.
LegalDevelopments:FourthQuarter,2011 217 takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).15TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccount arelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-incomeneighborhoods,inevaluatingbankingproposals.16 TheBoardhasconsideredcarefullyallthefactsof record,includingevaluationsof the CRAperformancerecordof Bank,informationprovidedbyGreenDot,andconfidential supervisoryinformation.Bankhasreceiveda“satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheFDIC,asof May21,2007.ToensurethatBankwillcontinuetomeetitsCRAobligationintheProvocommunity,GreenDothascommittedto submitaproposedstrategicplanforGreenDotBanktoitsprimaryfederalregulator withinsixmonthsof consummationof theproposal.17GreenDotalsohasstatedthat Bankwouldmaintainitscurrentlevelof lendingtoitslocalcommunity. OnMay19,2011,theOfficeof theAttorneyGeneralof Florida(“FloridaAG’sOffice”) announcedthatitisinvestigatingfiveprepaiddebitcardcompanies,includingGreenDot, forpossibledeceptiveandunfairpractices.TheBoardhasconsultedwiththeFloridaAG’s OfficeregardingthismatterandhasbeenadvisedbythatofficethatGreenDotisfully cooperatingwiththeinvestigation.18GreenDothasalsorepresentedthatitisdeveloping andwillissueGPRcardswithimproveddisclosuresthataredesignedtoaddressthemattersraisedbytheFloridaAG’sOfficeandtocomplywithFloridalaw. Basedonareviewof theentirerecord,theBoardhasconcludedthatconvenienceand needsconsiderationsandtheCRAperformancerecordof Bankareconsistentwith approvalof theproposal. FinancialHoldingCompanyElections Asnoted,GreenDotandBonnevillehavefiledelectionstobecomefinancialholdingcompaniespursuanttosections4(k)and(l)of theBHCActandsection225.82of theBoard’s RegulationY.GreenDotandBonnevillehavecertifiedthatBankiswellcapitalizedand wellmanagedandhaveprovidedalltheinformationrequiredunderRegulationY.Green DotandBonnevillehavealsocertifiedthattheyarewellcapitalizedandwellmanaged,pursuanttosection4(l)of theBHCAct,asamendedbysection606of theDodd-FrankWall StreetReformandConsumerProtectionAct.19Basedonallthefactsof record,theBoard hasdeterminedthattheelectionsof GreenDotandBonnevilletobecomefinancialholding companieswillbecomeeffectiveonconsummationof theproposal,if onthatdateGreen Dot,Bonneville,andBankremainwellcapitalizedandwellmanagedandif Bankhas receivedaratingof atleast“satisfactory”atitsmostrecentperformanceevaluationunder theCRA. 15 12U.S.C.§§2901–2908;12U.S.C.§1842(c)(2). 16 12U.S.C.§2903. 17 Underthestrategicplanalternative,abankisrequiredtodevelopaplan,usinginputfrommembersofthe publicinthebank’sassessmentarea(s),thatprovidesmeasurablegoalsformeetingthecreditneedsofthe bank’sassessmentarea(s).See,e.g.,12CFR228.27.Thebank’sprimaryfederalregulatorisresponsiblefor evaluatingtheplanand,ifapproved,thebank’ssuccessinachievingthegoalsoftheapprovedplan. 18 TheBoard’sactiononthisapplicationdoesnotlimitinanymannertheauthorityoftheStateofFloridato takeanyactionthatitconsidersappropriatewithrespecttoGreenDot. 19 Pub.L.No.111–203,124Stat.1376,codifiedat12U.S.C.§1843(l)(1).
218 FederalReserveBulletin|July2012 FinancialStability Asrequiredbysection3of theBHCAct,theBoardhasconsideredtheeffectsof theproposalonthestabilityof theUnitedStatesbankingorfinancialsystem.20Basedonareview of theentirerecord,theBoardhasconcludedthattheproposalwouldnotresultingreater ormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem. Conclusion Basedontheforegoing,andinlightof allfactsof record,theBoardhasdeterminedthat theapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoard hasconsideredtheapplicationrecordinlightof thefactorsthatitisrequiredtoconsider undertheBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebyGreenDotwithalltheconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof this action,thoseconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Theproposedtransactionmaynotbeconsummatedbeforethefifteenthcalendardayafter theeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof this order,unlesssuchperiodisextendedforgoodcausebytheBoardortheFederalReserve Bankof SanFrancisco,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember23,2011. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo andRaskin.Votingagainstthisaction:GovernorDuke. RobertdeV.Frierson DeputySecretaryof theBoard DissentingStatementof GovernorDuke Iamnotinfavorof approvingthisapplication.Asageneralmatter,Ihaveconcernsabout businessplansthatfocusnarrowlyononeorafewproducts.Companieswithnarrowbusinessplansfacerisksthataredifferentthanthosefacedbymorediversifiedcompaniesand aremorevulnerabletounexpectedshocks.Inthiscase,Ihavespecificconcernsaboutthe riskspresentedbyGreenDot’sproposaltoimplementabusinessplanatGreenDotBank focusedontheissuanceof general-purpose,reloadableprepaiddebitcards(“GPRcards”). GreenDot’sproposaltoimplementabusinessplanatGreenDotBankpredominantly focusedonissuingGPRcardswoulddirectlytiethefutureprospectsof GreenDottosuccessinthespecializedmarketforprepaiddebitcards.Theprepaiddebitcardindustryis subjecttovariousrisks,includingthepossibilitythatthetechnologycurrentlyemployedby industryparticipantscouldbecomeobsolete,thatconsumers’demandforprepaiddebit cardsasanalternativetomoretraditionalbankingproductsandservicescoulddecline,that potentiallegislativeorregulatorychangescouldreduceoreliminatetheprofitabilityof issuingprepaiddebitcards,andthatcompetitionintheprepaiddebitcardindustrymay increaseasaresultof full-servicebankingorganizationsenteringthemarket.Inaddition, thebusinessmodelemployedbyprepaiddebitcardproviders,includingthemodel 20 Section604oftheDodd-FrankWallStreetReformandConsumerProtectionAct,Pub.L.No.111–203,124 Stat.1376,codifiedat12U.S.C.§1842(c)(7).
LegalDevelopments:FourthQuarter,2011 219 employedbyGreenDot,involvessignificantexposuretooperational,concentration,consumer,counterparty,settlement,andcompliancerisks.Moreover,inadditiontothe increasedriskspresentedbyabusinessplanfocusedonanarrowbusinessactivity,Green Dotcurrentlyreliesonasingleretailpartnerforalargemajorityof itsrevenues,andaloss of therelationshipwouldhaveamateriallyadverseimpactonGreenDot’srevenues. Furthermore,IdonotbelievethatthestepsGreenDotproposedtomitigaterisk,including itscommitmentsthatBankwouldmaintainincreasedcapitallevelsforfiveyearsand refrainfrompayingdividendsforthreeyearsanditscommitmenttomaintaincertainlevels of cashandcashequivalents,adequatelyaddresstherisksposedbyGreenDot’sproposal tooperateGreenDotBankprimarilyasaGPRcardissuer.Thesecommitmentsmay increasetheabilityof GreenDottoabsorblosses,buttheydonotaddressthefundamental sourceof theriskposedbyGreenDot’snarrowbusinessplanand,consequently,donot actuallyreducetherisksassociatedwiththatbusinessplan. Forthesereasons,inmyviewtheconsiderationsrelatedtothefutureprospectsof Green DotandGreenDotBankarenotconsistentwithapproval. Accordingly,Iwoulddenythisproposal. November23,2011 Order Issued Under Bank Merger Act The Croghan Colonial Bank Fremont, Ohio OrderApprovingtheAcquisitionof Branches TheCroghanColonialBank(“Bank”),astatememberbankandasubsidiaryof Croghan Bancshares,Inc.,bothof Fremont,Ohio,hasappliedundersection18(c)of theFederal DepositInsuranceAct1(“BankMergerAct”)toacquirefourbranchesfromTheHome SavingsandLoanCompanyof Youngstown,Ohio(“HomeSavings”),Youngstown,inTiffin,Fremont,andClyde,allinOhio.2Bankhasalsoappliedundersection9of theFederal ReserveAct3(“FRA”)toestablishbranchesatthreeof thoselocations. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.4AsrequiredbytheBankMergerAct,reportsonthecompetitiveeffectsof the mergerwererequestedfromtheUnitedStatesAttorneyGeneralandtheFederalDeposit InsuranceCorporation(“FDIC”).Thetimeforfilingcommentshasexpired,andthe Boardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorsset forthintheBankMergerActandsection9of theFRA. 1 12U.S.C.§1828(c). 2 Thefourbranchestobeacquiredarelistedintheappendix. 3 12U.S.C.§321. 4 12CFR262.3(b).
220 FederalReserveBulletin|July2012 Bankisthe44thlargestinsureddepositoryinstitutioninOhio,withlessthan1percentof alldepositsinOhiobanksandthriftinstitutions.5HomeSavingsisthe16thlargestinsured depositoryinstitutioninOhio,withlessthan1percentof depositsinthestate. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.6TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.7 TheproposalwouldaffectcompetitionintheFremont,Ohiobankingmarket,whereBank andHomeSavingsdirectlycompete.8TheBoardhasreviewedcarefullythecompetitive effectsof theproposalonthebankingmarketinlightof allthefactsof record,including thenumberof competitorsthatwouldremaininthemarket,therelativeshareof thetotal depositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatBank wouldcontrol,9theconcentrationlevelof marketdepositsandtheincreaseinthislevelas measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”),10and othercharacteristicsof themarkets. Bankhasthelargestshareof marketdepositsintheFremontbankingmarketwith 37.6percent,andHomeSavingshastheninthlargestshareof marketdepositswith2.7percent.Onconsummationof theproposal,Bank’sshareof marketdepositswouldincrease to41.9percent,andtheHHIwouldincrease302points,from1971to2273. Inadditiontobanksandthriftinstitutions,therearetwocreditunionsthatoperateinthe Fremontbankingmarket:FremontFederalCreditUnionandClyde-FremontAreaCredit Union.Bothcreditunionshavebroadmembershipcriteriathatincludealltheresidentsin thebankingmarket.Inaddition,bothcreditunionscompeteactivelywithareabanksfor retailcustomersandofferservicessuchasstreet-leveloffices,drive-uplanes,andATMs. 5 DataareasofJune30,2011.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks, savingsbanks,andsavingsassociations. 6 12U.S.C.§1828(c)(5)(A). 7 12U.S.C.§1828(c)(5)(B). 8 TheFremontbankingmarketisdefinedasSanduskyCounty,excludingthecityofBellevue,allinOhio. 9 Dataarebasedoncalculationsinwhichthepre-acquisitiondepositsofHomeSavingsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome, significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin 386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhas includedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian, Inc.,77FederalReserveBulletin52(1991).Thepost-acquisitiondepositsofHomeSavingsareweightedat 100percentbecausethedepositswillbeownedbyacommercialbankingorganization.See,e.g.,NorwestCorporation,78FederalReserveBulletin452(1992). 10 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/ 10-at-938.html.
LegalDevelopments:FourthQuarter,2011 221 TheBoardfindsthatthesecircumstanceswarrantincludingthedepositsof thesecredit unionsona50percentweightedbasis.11 If bothcreditunionsareincludedonaweightedbasis,Bank’sproformashareof market depositswouldbe36percent,andtheHHIwouldincreaseby231points,from1554to 1785.TheBoardhasconcludedthattheactivitiesof thesecreditunionsexertacompetitive influencethatmitigates,inpart,thepotentialeffectsof theproposalintheFremontbankingmarket.Inaddition,numerouscompetitorswouldremaininthebankingmarket.Four bankswouldeachhavesharesof marketdepositsrangingfrom8percentand11percent. TheDOJhasreviewedtheanticipatedcompetitiveeffectsof theproposalandhasadvised theBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverse effectoncompetitionintherelevantbankingmarket.TheFDIChasbeenaffordedan opportunitytocommentandhasnotobjectedtotheproposal. TheBoardhasreviewedcarefullyallthefactsof recordand,forthereasonsdiscussedin thisorder,hasconcludedthatconsummationof theproposalisnotlikelytoaffectcompetitionortheconcentrationof resourcesinasignificantlyadversemannerintherelevant bankingmarket.Accordingly,basedonallthefactsof record,theBoardhasdetermined thatcompetitivefactorsareconsistentwithapprovalof theproposal. Financial,Managerial,andOtherSupervisoryFactors InreviewingthisproposalundertheBankMergerActandsection9of theFRA,the Boardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof the institutionsinvolved.TheBoardhasreviewedthesefactorsinlightof allthefactsof record,includingsupervisoryreportsof examinationassessingthefinancialandmanagerialresourcesof Bankandinformationprovidedbythebank.TheBoardnotesthatBank wouldremainwellcapitalizedonconsummationof theproposal.Basedonallthefactsof record,theBoardconcludesthatthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolvedandothersupervisoryfactorsareconsistentwithapproval of theproposal. ConvenienceandNeedsConsiderationsandFinancialStability TheBankMergerActalsorequirestheBoardtoconsidertheconvenienceandneedsof the communitiestobeservedandtotakeintoaccounttherecordsof therelevantdepository institutionsundertheCommunityReinvestmentAct(“CRA”).12TheCRArequiresthe federalfinancialsupervisoryagenciestoencouragefinancialinstitutionstomeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-incomeneighborhoods,inevaluatingbankacquisitionproposals. Accordingly,theBoardhascarefullyconsideredtheconvenienceandneedsfactorandthe CRAperformancerecordsof BankandHomeSavingsinlightof allthefactsof record. AsprovidedintheCRA,theBoardhasevaluatedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof theCRAperformancerecords 11 TheBoardpreviouslyhasconsideredthecompetitivenessofcertainactivecreditunionsasamitigatingfactor. See,e.g.,ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancial Corporation,93FederalReserveBulletinC16(2007);WachoviaCorporation,92FederalReserveBulletinC183 (2006);andF.N.B.Corporation,90FederalReserveBulletin481(2004). 12 12U.S.C.§2901etseq.
222 FederalReserveBulletin|July2012 of therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailedon-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.13 Bankreceivedanoverallratingof “satisfactory”atitsmostrecentCRAperformance examinationbytheFederalReserveBankof Cleveland,asof June2011.HomeSavings receivedanoverallratingof “satisfactory”fromtheFDICatitsmostrecentevaluationfor CRAperformance,asof July2008. Basedonallthefactsof recordandforthereasonsdiscussedabove,theBoardconcludes thatconsiderationsrelatingtotheconvenienceandneeds,includingtheCRAperformance recordsof therelevantdepositoryinstitutions,areconsistentwithapprovalof theproposal. TheBoardhasalsocarefullyconsideredinformationrelevanttoriskstothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardconcludesthatfinancialstability considerationsinthisproposalareconsistentwithapproval. Establishmentof Branches Asnotedabove,Bankhasalsoappliedundersection9of theFRAtoestablishbranchesat threeof theacquiredofficesof HomeSavings.Bankhasindicatedthatitintendstoclose thebranchinClyde,Ohio,thatitwouldacquirefromHomeSavingsandtoconsolidateits operationsintoabranchthatBankcurrentlyoperatesthatislessthanone-tenthof amile away.14TheBoardhasconsideredthefactorsitisrequiredtoconsiderwhenreviewingan applicationforestablishingbranchespursuanttosection9of theFRA15andforthereasonsdiscussedinthisorder,findsthosefactorsareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyBankwithallthecommitmentsmadeinconnectionwiththisproposaland theconditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedtobe conditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedings underapplicablelaw. Theacquisitionmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBank of Cleveland,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember28,2011. 13 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 14 BothbranchesareintheFremontbankingmarket.Theproposedbranchclosurequalifiesasa“shortdistance” consolidation.SeeJointPolicyStatementRegardingBranchClosings,64FederalRegister34844at34846. Accordingly,theclosureisnotsubjecttothenoticerequirementsofsection42oftheFederalDepositInsuranceAct.12U.S.C.§1831r-1(e);64FederalRegister34844at34846. 15 See12U.S.C.§322.
LegalDevelopments:FourthQuarter,2011 223 Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Appendix BranchesinOhiotobeAcquiredfromHomeSavings 1. 48E.MarketStreet,Tiffin44883 2. 796W.MarketStreet,Tiffin44883 3. 910SeanDrive,Fremont43420 4. 225N.MainStreet,Clyde43410(tobeclosed) Orders Issued Under International Banking Act Banco do Estado do Rio Grande do Sul S.A. Port Alegre, Brazil OrderApprovingEstablishmentof aBranch BancodoEstadodoRioGrandedoSulS.A.(“Bank”),PortAlegre,Brazil,aforeignbank withinthemeaningof theInternationalBankingAct(“IBA”),hasappliedundersection7(d)of theIBA1toestablishalimitedfederalbranchinMiami,Florida.TheForeign BankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinMiami(MiamiDailyBusiness Review,March12,2010).Thetimeforfilingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. Bank,withtotalassetsof approximately$19.0billion,2istheeleventhlargestbankinBrazil.TheStateof RioGrandedoSulownsapproximately99.6percentof Bank’svoting stock.Bankprovidesarangeof bankingservicesandfinancialproductstoretailcustomers,small-andmedium-sizedcompanies,andpublic-sectorentities.Bankcurrentlyoperates abranchinNewYork,NewYork,andthisbranchwillbeclosedsoonaftertheproposed limitedfederalbranchinMiamiisestablished.BankalsooperatesabranchintheCayman Islands.Bankmeetstherequirementsforaqualifyingforeignbankingorganizationunder RegulationK.3 Bankproposestorelocatetheoperationsof itsexistingbranchinNewYorktoMiamiin ordertobetterservetheneedsof itscustomersintheUnitedStates.Consistentwiththe restrictionsonalimitedbranch,theproposedbranchwouldnottakeanydeposits otherthanthosepermittedforacorporationorganizedundersection25Aof theFederal ReserveAct.4 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofJune30,2011. 3 12CFR211.23(a). 4 Toconvertthelimitedbranchintoabranch,Bankmustapplypursuanttosection7oftheIBA.12U.S.C. §3105(d).Undersection25AoftheFederalReserveAct,anEdgecorporationmayreceivedepositsoutsidethe UnitedStatesandonlysuchdepositswithintheUnitedStatesthatareincidentaltoorforthepurposeofcarry-
224 FederalReserveBulletin|July2012 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates;(2)hasfurnishedtheBoardwiththeinformationitneedstoassesstheapplicationadequately;and(3)issubjecttocomprehensive supervisiononaconsolidatedbasisbyitshomecountrysupervisors.5TheBoardalsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.6 Asnotedabove,Bankengagesdirectlyinthebusinessof bankingoutsidetheUnited States.BankalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardpreviouslyhasdeterminedthatotherbanksinBrazilaresubjecttohomecountrysupervisiononaconsolidated basisbytheCentralBankof Brazil(“CentralBank”),whichhasprimaryresponsibilityfor theregulationof financialinstitutionsinBrazil.7BankissupervisedbytheCentralBank onsubstantiallythesametermsandconditionsastheseotherbanks.Basedonallthefacts of record,ithasbeendeterminedthatBankissubjecttocomprehensivesupervisionona consolidatedbasisbyitshomecountrysupervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.8TheCentralBankhasnoobjectiontotheestablishmentof theproposedbranch. Withrespecttothefinancialandmanagerialresourcesof Bank,takingintoconsideration thebank’srecordof operationsinitshomecountry,itsoverallfinancialresources,andits standingwithitshomecountrysupervisors,financialandmanagerialfactorsareconsistent withapprovalof theproposedlimitedbranch.Brazilhasadoptedrisk-basedcapitalstaningouttransactionsinforeigncountries.12U.S.C.§615(a).RegulationKdefinestheextentofpermissible deposit-takingactivitiesofEdgecorporations.12CFR211.6(a)(1).Undersection5oftheIBA,aforeignbank mayestablishabranchoutsideitshomestateifthebranchlimitsitsdeposit-takingtothatofanEdgecorporationoperatingundersection25AoftheFederalReserveAct.12U.S.C.§3103(a)(7)(A).Currently,Bank’s homestateisNewYork.RegulationsimplementingtheIBAallowforeignbankstochangetheirhomestateone timewithpriornoticetotheFederalReserve.12CFR211.22(b).WiththeclosureoftheNewYorkbranch, BankwillchangeitsIBAhomestatefromNewYorktoFlorida. 5 12U.S.C.§3105(d)(2);12CFR211.24.Inassessingthisstandard,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors:(i)ensurethatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformation ontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,on aworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 6 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;thefinancialandmanagerialresourcesofthebank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountrytoaddress moneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthe community;thebank’srecordofoperation.TheBoardmayalsotakeintoaccount,inthecaseofaforeign bankthatpresentsarisktothestabilityoftheUnitedStates,whetherthehomecountryoftheforeignbank hasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 7 TheBoardhasdeterminedthatthreeBrazilianbanks,BancoItaúS.A.,BancoBradescoS.A.,andBancodo BrasilS.A.,weresubjecttocomprehensiveconsolidatedsupervisionbytheCentralBankinconnectionwith eachbank’selectiontobetreatedasafinancialholdingcompany(effectiveinFebruary2002forBancoItaú,in January2004forBancoBradescoS.A.,andinApril2010forBancodoBrasil). 8 See,supra,note6.
LegalDevelopments:FourthQuarter,2011 225 dardsthatareconsistentwiththoseestablishedbytheBaselCapitalAccord(“Accord”). Bank’scapitalisinexcessof theminimumlevelsthatwouldberequiredbytheAccordand isconsideredequivalenttocapitalthatwouldberequiredof aU.S.bankingorganization. Managerialandotherfinancialresourcesof Bankalsoareconsistentwithapproval,and Bankappearstohavetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,BankhasestablishedcontrolsandproceduresfortheproposedbranchtoensurecompliancewithU.S.lawandforitsoperationsingeneral. Brazilisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaundering.Inaccordancewiththeserecommendations,Brazilhasenactedlawsandcreatedlegislativeandregulatorystandardstodeter moneylaundering,terroristfinancing,andotherillicitactivities.Moneylaunderingisa criminaloffenseinBrazil,andfinancialinstitutionsarerequiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaundering throughouttheirworldwideoperations.Bankhaspoliciesandprocedurestocomplywith theselawsandregulations,andBank’scompliancewithapplicablelawsandregulationsis monitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationaboutBank’soperations,theBoardhasreviewedthe restrictionsondisclosureinrelevantjurisdictionsinwhichBankoperatesandhascommunicatedwithrelevantgovernmentauthoritiesregardingaccesstoinformation.Bankhas committedtomakeavailabletotheBoardsuchinformationontheoperationsof Bankand anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliance withtheIBA,theBankHoldingCompanyAct,andotherapplicablefederallaw.Tothe extentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylawor otherwise,BankhascommittedtocooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,andsubjecttothecondition describedbelow,theBoardhasdeterminedthatBankhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStates financialsystemhasalsobeenreviewed.Inparticular,considerationhasbeengiventothe absoluteandrelativesizeof Bankinitshomecountry,thescopeof Bank’sactivities, includingthetypeof activitiesitproposestoconductintheUnitedStatesandthepotential forthoseactivitiestoincreaseortransmitfinancialinstability,andtheframeworkinplace forsupervisingBankinitshomecountry.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBank,as wellasthetermsandconditionssetforthinthisorder,Bank’sapplicationtoestablisha limitedfederalbranchisherebyapprovedbytheDirectorof theDivisionof Banking SupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuantto authoritydelegatedbytheBoard.9Shouldanyrestrictionsonaccesstoinformationonthe operationsoractivitiesof BankanditsaffiliatessubsequentlyinterferewiththeBoard’s abilitytoobtaininformationtodetermineandenforcecompliancebyBankoritsaffiliates withapplicablefederalstatutes,theBoardmayrequireterminationof anyof Bank’sdirect orindirectactivitiesintheUnitedStates,orinthecaseof anysuchoperationlicensedby theOfficeof theComptrollerof theCurrency(“OCC”),recommendterminationof such operation.Approvalof thisapplicationalsoisspecificallyconditionedoncomplianceby Bankwiththecommitmentsmadeinconnectionwiththisapplicationandwiththecondi- 9 12CFR265.7(d)(12).
226 FederalReserveBulletin|July2012 tionsinthisorder.10Thecommitmentsandconditionsreferredtoaboveareconditions imposedinwritingbytheBoardinconnectionwiththisdecisionandmaybeenforcedin proceedingsunder12U.S.C.§1818againstBankanditsaffiliates. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveOctober6, 2011. RobertdeV.Frierson DeputySecretaryof theBoard Bankia, S.A. Valencia, Spain OrderApprovingEstablishmentof aBranch Bankia,S.A.(“Bankia”),aforeignbankwithinthemeaningof theInternationalBanking Act(“IBA”),hasappliedundersection7(d)of theIBA1toestablishabranchinMiami, Florida.TheForeignBankSupervisionEnhancementActof 1991,whichamendedthe IBA,providesthataforeignbankmustobtaintheapprovalof theBoardtoestablisha branchintheUnitedStates.2 Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculation(MiamiHerald,June14,2011).The timeforfilingcommentshasexpired,andtheBoardhasconsideredallcommentsreceived. Bankia,withtotalassetsof approximately$406.3billion,3isthefourthlargestbankin Spain.BancoFinancieroydeAhorros,S.A.(“BFA”),Madrid,Spain,owns52.4percentof Bankia.4Noothershareholderownsmorethan5percentof thesharesof Bankia.Bankia isacommercialbankthatoffersservicesandproductsinretailbanking,corporatebanking andfinance,capitalmarkets,assetmanagement,andpersonalbanking.Bankiaintendsto takeovertheinternationaloperationspreviouslyconductedbythesavingsbanksthatown BFA.Bankia’sindirectparents,CajaMadridandBancaja,maintainanagencyand branch,respectively,inMiami,Florida.BankiameetstherequirementsforaqualifyingforeignbankingorganizationunderRegulationK.5 10 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthority oftheOCCtolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplantthe authorityoftheOCCtolicensetheproposedofficeofBankinaccordancewithanytermsorconditionsthatit mayimpose. 1 12U.S.C.§3105(d). 2 Id. 3 AssetandrankingdataareasofSeptember30,2011. 4 BFAwascreatedthroughaSistemaInstitucionaldeProtección(IntegrationAgreement),anintegrationtransactionsupportedbytheBankofSpaintoaddresstheeffectsoftheglobalfinancialcrisisonSpanishfinancial institutionsbyconsolidatinganumberofSpanishsavingsbanks,orcajasdeahorros,operatinginSpain.BFA wasestablishedbysevenSpanishsavingsbanks,includingCajadeAhorrosyMontedePiedaddeMadrid, CajaMadrid(“CajaMadrid”),whichowns52.1percentofBFA,andCajadeAhorrosdeValencia,Castellóny Alicante,Bancaja(“Bancaja”),whichowns37.7percent.Eachoftheremainingfivesavingsbanksownsless than3percentoftheissuedsharesofBFA.TheBoardapprovedBFA’sapplicationtobecomeabankholding companyonDecember16,2010.SeeCajadeAhorrosdeValencia,CastellónyAlicante,Bancaja,97Federal ReserveBulletin4(2011).BFAreceived€4.465billionfromtheFondodeReestructuraciónOrdenadaBancaria (“FROB”)inexchangeforperpetualconvertiblepreferencesharesofBFA.FROBwascreatedbytheSpanish governmenttosupportandfacilitateintegrationstransactionsamongSpanishfinancialinstitutions.FROBisa bankholdingcompanybyvirtueofitsownershipinterestinBFA.SeeCajadeAhorrosdeValencia,Castellóny Alicante,Bancaja,supra.FROB’sinvestmentinBFArepresentsapproximately17percentofthetotalequity and,ifconvertedtovotingshares,wouldrepresent17percentofBFA’svotingshares.Thecurrentproposal wouldnotincreaseFROB’sindirectownershipofanybankintheUnitedStates. 5 12CFR211.23(a).
LegalDevelopments:FourthQuarter,2011 227 Bankia,aspartof acorporatereorganization,6proposestoestablishthebranchtoassume theoperationsof CajaMadrid’sagencyandBancaja’sbranch,andthoseofficeswouldbe closed.TheproposedbranchwouldoffersubstantiallythesameproductsandservicescurrentlyprovidedbytheCajaMadridandBancajaoffices. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates;(2)hasfurnishedtheBoardtheinformation itneedstoassesstheapplicationadequately;and(3)issubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.7TheBoardalsoconsiders additionalstandardsassetforthintheIBAandRegulationK.8 Asnotedabove,Bankiaengagesdirectlyinthebusinessof bankingoutsidetheUnited States.BankiaalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthroughitssubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardpreviouslyhasdeterminedthatBFA,CajaMadrid,andBancajaaresubjecttocomprehensivesupervisionona consolidatedbasisbytheirhomecountrysupervisor.9TheBoardalsohasdeterminedthat otherbanksinSpainthataresupervisedunderthesameregimeasBankiaweresubjectto homecountrysupervisiononaconsolidatedbasis.10BankiaissupervisedbytheBankof SpainonsubstantiallythesametermsandconditionsasBFA,CajaMadrid,Bancaja,and thoseotherbanks.Basedonallthefactsof record,theBoardhasdeterminedthatBankia issubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountry supervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.11TheBankof Spainhasnoobjectiontotheestablishmentof theproposedbranch. 6 SubsequenttoBFA’screation,BFAandthesavingsbanksagreedtotransfercertainBFAassetsandliabilities, includingthegroup’sbankingbusiness,toBankia. 7 12U.S.C.§3105(d)(2);12CFR211.24.Inassessingthisstandard,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensurethatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformation ontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandardssuchascapitaladequacyandriskassetexposure,on aworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 8 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowingconsiderations:whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthebank;whetherthebank hasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountryto addressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombat moneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthe bank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;the needsofthecommunity;thebank’srecordofoperation;inthecaseofaforeignbankthatpresentsariskto thestabilityoftheUnitedStates,whetherthehomecountryoftheforeignbankhasadopted,orismaking demonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystem ofsuchhomecountrytomitigatesuchrisk. 9 SeeCajadeAhorrosdeValencia,CastellónyAlicante,Bancaja,supra;CajadeAhorrosyMontedePiedadde Madrid,95FederalReserveBulletinB23(2009);CajadeAhorrosdeValencia,CastellónyAlicante,Bancaja,84 FederalReserveBulletin231(1998). 10 See,e.g.,BancoPopularEspañolS.A.,92FederalReserveBulletinC130(2006);BancoBilbaoVizcayaArgentaria,S.A.,91FederalReserveBulletin258(2005);BancoPastor,S.A.,87FederalReserveBulletin555(2001). 11 See,supra,note8.
228 FederalReserveBulletin|July2012 Withrespecttothefinancialandmanagerialresourcesof Bankia,takingintoconsideration thebank’srecordof operationsinitshomecountry,itsoverallfinancialresources,andits standingwithhomecountrysupervisors,financialandmanagerialfactorsareconsistent withapprovalof theproposedbranch.Spainhasadoptedrisk-basedcapitalstandardsthat areconsistentwiththoseestablishedbytheBaselCapitalAccord(“Accord”).Bankia’s capitalisinexcessof theminimumlevelsthatwouldberequiredbytheAccordandisconsideredequivalenttocapitalthatwouldberequiredof aU.S.bankingorganizationfora similarproposal.Managerialandotherfinancialresourcesof Bankiaarealsoconsistent withapproval,andBankiaappearstohavetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,BankiahasestablishedcontrolsandproceduresfortheproposedbranchtoensurecompliancewithU.S.law. Spainhasenactedlawsandregulationstodetermoneylaunderingthatareconsistentwith theFinancialActionTaskForcerecommendations.Moneylaunderingisacriminaloffense inSpain,andfinancialinstitutionsarerequiredtoestablishinternalpolicies,procedures, andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.Bankiahaspoliciesandprocedurestocomplywiththeselawsandregulations,anditscompliancewithapplicablelawsandregulationsismonitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationaboutBankia’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichBankiaoperateshavebeenreviewedandrelevant governmentauthoritieshavebeencontactedregardingaccesstoinformation.Bankiahas committedtomakeavailabletotheBoardsuchinformationontheoperationsof Bankia andanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBA,theBankHoldingCompanyAct,andotherapplicablefederallaw. Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylaw orotherwise,BankiahascommittedtocooperatewiththeBoardtoobtainanynecessary consentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,ithasbeendeterminedthatBankiahasprovidedadequateassurances of accesstoanynecessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankActamendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresentsarisktothestabilityof theUnitedStatesfinancial system,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemof financialregulationforthe financialsystemof suchhomecountrytomitigatesuchrisk.12Spainhasmadeprogress towardadoptingasystemof financialregulationforitsfinancialsystemtomitigatetherisk tofinancialstabilityfromitsbanks.TheBankof SpainandtheSpanishgovernmenthave takenanumberof measurestostrengthentheoverallfinancialsupervisoryregime.These measuresincludesupportingtheintegrationof Spanishsavingsbanksintofinancial groups,adoptinglegislativemeasuresthatincreaseminimumcapitalrequirementsfor Spanishfinancialinstitutions,andrequiringfinancialinstitutionstoimplementtheir recapitalizationplans.TheBankof SpainalsoestablishedaFinancialStabilityDepartment tomonitorandanalyzefinancialstabilityrisksandissuesintheSpanishandglobalfinancialsystemsandproducesanannualFinancialStabilityReportthatincludesanassessment of thekeymacroeconomicandfinancialmarketrisksinSpain.Inaddition,Spanish authoritieshavebeenactivelyinvolvedinadvancinginternationalfinancialstabilitydiscussionsinvariousfora,includingtheOrganisationforEconomicCo-operationandDevelopment,theInternationalMonetaryFund,theBaselCommitteeonBankingSupervision, 12 12U.S.C.§3105(d)(3)(E).
LegalDevelopments:FourthQuarter,2011 229 andtheFinancialStabilityBoard.Morerecently,SpainactivelyparticipatedintheG-20 meetingof financeministersandcentralbankgovernorswhereagreementwasreachedon asetof guidelinesthatmeasurepotentiallydestabilizingimbalancesintheglobaleconomy asafirststeptowardmakingtheworldlesspronetofinancialcrisis. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBankia anditsparentcompanies,aswellasthetermsandconditionssetforthinthisorder, Bankia’sapplicationtoestablishabranchinMiamiisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneral Counsel,pursuanttoauthoritydelegatedbytheBoard.13Shouldanyrestrictionsonaccess toinformationontheoperationsoractivitiesof Bankiaanditsaffiliatessubsequently interferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyBankia’soritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof Bankiaoritsaffiliates’directorindirectactivitiesintheUnitedStates. Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyBankiawith thecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthis order.14ThecommitmentsandconditionsreferredtoaboveareconditionsimposedinwritingbytheBoardinconnectionwiththisdecisionandmaybeenforcedinproceedings under12U.S.C.§1818againstBankiaanditsaffiliates. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveDecember16, 2011. RobertdeV.Frierson DeputySecretaryof theBoard 13 12CFR265.7(d)(12). 14 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthority oftheStateofFloridatolicensebranchesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnot supplanttheauthorityoftheStateofFloridaoritsagent,theOfficeofFinancialRegulation(“OFR”),to licensetheproposedbranchofBankiainaccordancewithanytermsorconditionsthattheOFRmayimpose.
231 Federal Reserve BULLETIN October 2012 Vol. 98, No. 5 Legal Developments: First Quarter, 2012 Orders Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act Adam Bank Group, Inc. Tampa, Florida OrderApprovingtheAcquisitionof aBank FRBOrderNo.2012-3(March21,2012) AdamBankGroup,Inc.(“ABG”),Tampa,Florida,hasrequestedtheBoard’sapproval undersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquireBrazosValley Bank,NationalAssociation(“Bank”),CollegeStation,Texas. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister60837(2011)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. ABG,withtotalconsolidatedassetsof approximately$935million,isthe729thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$728millionindeposits.2ABG’sonlysubsidiaryinsureddepositoryinstitution,AmericanMomentumBank(“AMB”),Tampa,operatesinFloridaandTexas.3AMBisthe85thlargest depositoryorganizationinFlorida,controllingdepositsof approximately$380million, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsinthestate.AMBisthe305thlargestdepositoryorganizationinTexas,controllingdepositsof approximately$118million,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsinthatstate.4 Bank,withtotalassetsof approximately$113million,isthe344thlargestinsureddepositoryinstitutioninTexas,controllingdepositsof approximately$106million.Onconsummationof thisproposal,ABGwouldbecomethe201stlargestdepositoryorganizationin Texas,controllingdepositsof approximately$224million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. 1 12U.S.C.§1842. 2 Nationaldeposit,asset,andrankingdataareasofDecember31,2011,andareupdatedtoreflectmergersthrough thatdate.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavings banks. 3 ABGowns91.6percentofthevotingsharesofAMB. 4 Statedeposit,asset,andrankingdataareasofJune30,2011.Thestatedeposit,asset,andrankingdatadonotinclude twoacquisitionsafterJune30thatarereflectedinthenationaldeposit,assetandrankingdatanotedabove.Seenote2. ThoseacquisitionsdidnotaffectcompetitioninTexasandinparticular,theBryan-CollegeStation,Texasbanking market.
232 FederalReserveBulletin|October2012 InterstateAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding company(“BHC”)thatiswellcapitalizedandwellmanagedtoacquirecontrolof abank inastateotherthantheBHC’shomestatewithoutregardtowhetherthetransactionis prohibitedunderstatelaw.5However,thissectionfurtherprovidesthattheBoardmaynot approveanapplicationthatwouldpermitanout-of-stateBHCtoacquireahoststate’s bankthathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.6Inaddition,theBoardmaynotapproveanapplicationbyaBHCto acquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthehomestateof theBHCandtheapplicantcontrolsorwould controlmorethan10percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.7 Forpurposesof theBHCAct,thehomestateof ABGisFlorida,8andBankislocatedin Texas.9ABGiswellcapitalizedandwellmanagedunderapplicablelaw.Texaslawimposes afive-yearagerequirement,10andBankhasbeeninexistenceformorethanfiveyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutionsinthe UnitedStates,thetotalamountof depositsof insureddepositoryinstitutionsis$9.6trillion.Onconsummationof theproposedtransaction,ABGwouldcontrollessthan1percentof thetotalamountof depositsininsureddepositoryinstitutionsintheUnitedStates. Accordingly,andinlightof allthefactsof record,theBoardisnotrequiredtodenythe proposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposedbankacquisitionthatwouldsubstantiallylessencompetitioninany relevantbankingmarketunlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.11 AMBandBankcompetedirectlyintheBryan-CollegeStation,Texasbankingmarket.12 AMBoperatesabranchinCollegeStation,whichisinBrazosCounty.Bank’sheadoffice isalsoinCollegeStation.TheBoardhasreviewedthecompetitiveeffectsof theproposalin thisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhasconsid- 5 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct,Pub.L.No. 111-203,124Stat.1376,codifiedat12U.S.C§1842(d)(1)(A). 6 12U.S.C.§1842(d)(1)(B). 7 12U.S.C.§1842(d)(2)(A). 8 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 9 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)–(7)and1842(d)(1)(A) and1842(d)(2)(B). 10 TexFi.CodeAnn.§202.003. 11 12U.S.C.§1842(c)(1). 12 TheBryan-CollegeStation,TexasbankingmarketisdefinedasBrazosCounty,Texas.
LegalDevelopments:FirstQuarter,2012 233 eredthenumberof competitorsthatwouldremaininthebankingmarket;therelative sharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”) controlledbyAMBandBank;13theconcentrationlevelof marketdepositsandthe increaseinthoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeMergerCompetitiveReviewGuidelines(“DOJBankMerger Guidelines”);14andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheBryan-CollegeStationbankingmarket.Onconsummation,theHHImeasureof concentrationwouldincreaseby26pointsto 1041.Theappropriatebankingagencieshavebeenaffordedanopportunitytocomment andhavenotobjectedtotheproposal.15 Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketwherethesubsidiarydepositoryinstitutionsof AMB andBankcompetedirectlyorinanyotherrelevantbankingmarket.Accordingly,the Boardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationthefollowing factorsinactingonbankacquisitionapplications:thefinancialandmanagerialresources (includingconsiderationof thecompetence,experience,andintegrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof thecompanyandbanksconcerned;theeffectivenessof thecompanyincombattingmoneylaundering;theconvenience andneedsof thecommunitytobeserved;andtheextenttowhichtheproposalwould resultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingor financialsystem.TheBoardhasconsideredallof thesefactorsand,asdescribedbelow,has determinedthattheyareconsistentwithapprovalof theapplication.Thereviewwasconductedinlightof allthefactsof record,includingsupervisoryandexaminationinformationfromvariousU.S.bankingsupervisorsof theinstitutionsinvolved,publicly reportedandotherfinancialinformation,andinformationprovidedbyABG. 13 DepositandmarketsharedataareasofJune30,2011,adjustedtoreflectmergersandacquisitionsthrough June30andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.The Boardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significant competitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989); NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthrift depositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77Federal ReserveBulletin52(1991). 14 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMerger Guidelines,DOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified. PressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at-938.html. 15 IntheBryan-CollegeStationbankingmarket,AMBcontrols$118millionindeposits,representing4.2percent oftotaldepositsinthemarket,andBankcontrols$105.6millionindeposits,representing3.7percentoftotal depositsinthemarket.Onconsummation,ABGwouldcontrol$223.6millionindeposits,representing7.9percentoftotalmarketdeposits.
234 FederalReserveBulletin|October2012 A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpact of theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. ABGandAMBarewellcapitalizedandwillremainsoonconsummationof theproposed acquisition.ABGisashellentity,andAMBcomprises99.8percentof itsconsolidated assets.Theproposedtransactionisabankmerger,structuredasacashpurchaseof shares. AMBwillfundthepurchasefromexistingliquidity.AMBhasbeeninoperationsince October2006,andachievedprofitableoperationsforfiscalyearsending2010and2011. AMBsuccessfullyintegratedtwofailedbankacquisitionsduringJuly2011,acquiring assetsanddepositliabilitiesof approximately$297million.Onaproformabasis,the acquisitionof BankwouldnothaveasignificantimpactonAMB’soperations.Basedon itsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancial resourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of ABG,AMB,andBank,includingassessmentsof theirmanagement,risk-management systems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiences andthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheir recordsof compliancewithapplicablebankingandanti-money-launderinglaws.The BoardalsohasconsideredABG’splansforimplementingtheproposal. ABGandAMBareconsideredtobewellmanaged.Theboardsandseniormanagementof ABGandAMB16havesignificantcommunitybankingexperience.Inaddition,thechairmanof AMBhasasuccessfulrecordof acquiringandintegratingtheoperationsof troubleddepositoryinstitutionsintoalargerprofitableinstitutioninasafeandsoundmatter.Asnotedabove,AMBpurchasedtwofailedbanksinJuly2011thatarenowpartof the ABGorganization. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalareconsistentwithapproval,asaretheothersupervisoryfactors. B.ConvenienceandNeedsConsiderations Undersection3,theBoardmustconsidertheeffectsof theproposalontheconvenience andneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).17The CRArequiresfederalfinancialsupervisoryagenciestoencourageinsureddepositoryinsti- 16 TheproformamanagementoftheorganizationwillbethesameasthecurrentmanagementofABG andAMB. 17 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq.
LegalDevelopments:FirstQuarter,2012 235 tutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,18andrequirestheappropriatefederalfinancial supervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods,inevaluatingbankexpansionaryproposals.19 TheBoardhasconsideredallthefactsof record,includingevaluationsof theCRAperformanceof AMBandBank,datareportedbyAMBundertheHomeMortgageDisclosure Act(“HMDA”),20otherinformationprovidedbyABG,confidentialsupervisoryinformation,andpubliccommentreceivedontheproposal.Acommentercriticizedtheperformanceof AMBinmeetingthecreditneedsof LMIandminorityborrowersandof residentsinpredominatelyminorityareas.Thecommenterassertedthatfrom2007to2009,no mortgageloansweremadetolow-incomeborrowersandthatonlyonewasmadetoamoderate-incomeborrower.ThecommenterfurtherstatedthatAMBdidnotreceiveanymortgageapplicationsfromminorityborrowersandoriginatedonlyonemortgageloaninapredominatelyminoritycensustractforthatperiod.Thecommenteralsocriticizedthebank’s branchdistributioninlow-incomeandminorityareas. Inevaluatingthisproposal,theBoardalsoconsultedwiththeFederalDepositInsurance Corporation(“FDIC”)onitssupervisoryexperiencewithAMB,includingAMB’slending performance,andtheFDIC’sreviewof asubstantiallysimilarcommentthatitreceivedin connectionwithamergerapplicationfromAMB.Inaddition,theBoardhasconsidered theconvenienceandneedsfactorasprovidedintheCRAinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.21Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor.AMBreceiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof October24,2008,andBankreceiveda“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency,asof January22,2007. Inaddition,theBoardhasconsideredtheHMDAdatafor2009and2010reportedby AMBinBrazosCounty,Texas,22andhasconsideredthefairlendingrecordof AMB.The BoardalsohasreviewedsupervisoryinformationandconsultedwiththeFDIC.The HMDAdatashowthatAMB’smortgagelendingislimited.23Accordingtothedata,AMB madenoloanstominoritiesduringthisperiod.ABGstatedthatduringthesevereeconomicdownturninFlorida,AMBsoughtotherfinancingopportunities,suchascommunitydevelopmentloanstomeetthelendingneedsof themarket.ABGstatedthatAMB hastakenacautiousapproachtoexpandingitsbranchnetworktomaintainastrongfocus onsafetyandsoundness.ABGalsonotedthatthebank’smostrecentlyestablishedbranch isinamoderate-incometractinClearwater. 18 12U.S.C.§2901(b). 19 12U.S.C.§2903. 20 12U.S.C.§2801etseq. 21 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 22 TheBoardconsideredtheHMDAdatareportedbyAMBforBrazosCountybecauseallthebank’sHMDA originationsduringthisperiodwereinTexasandthatisthelocationofitsTexasbranch. 23 AMBindicatedthat,inadditiontoAMB’sHMDA-reportablelending,thebankreceived23requestsformortgageloansthatwerereferredtoandclosedbyitscorrespondentlenders.ABGreportedthatapproximately $508,000oftheseloanswereforpropertiesinmoderate-incomeareas.
236 FederalReserveBulletin|October2012 Becauseof thelimitationsof HMDAdata,theBoardhasconsideredotherkindsof lendingeffortsbyAMB.24Forexample,AMBhasprovidedmorethan$58millioninfinancing todeveloperswhobuildandoperateaffordablehousing.Thebanksupportedoneproject thatincluded53affordable1-4familyhomesinalowtomoderateincome,predominantly minorityneighborhood.AMBhassoughtoutadditionalcommunitydevelopmentlending opportunitiesandhasprovidedfinancingfortheacquisition/development/rehabilitationof multifamilyaffordablehousingprojectstotaling$160.8million,including$66.1millionin loansforpropertiesinlow-to-moderateincomeareas.AMBhasprovided$68.3millionin loansinthecommunitiesof BryanandCollegeStationfortheconstructionof singlefamilyhomes.Of thistotal,$4.8millionwasinlow-to-moderateincomecensustractsand 59percentwereaffordablehomesqualifyingforlowdownpaymentsortheFirstTime Homebuyer’sProgram. AlthoughAMBiscurrentlynotasignificantHMDAlender,itisbeginningeffortsto increaseitshomemortgagelendinginFloridaandTexas.ABGrecentlyhiredasenior mortgageproductionexpertwhohasbegundevelopmentof acomprehensiverealestate lendinginitiativeforFloridaandTexas. AMBhasinplaceaformalfairlendingprogramthatincludesitshomemortgageandsmall businesslendingoperations.AMBalsoprovidesinternalcompliancetraining,andthe bank’sstaffsinbankmanagement,line-of-business,andcomplianceattendoutsideconferencesandseminarsandotherfairlendingandconsumerprotectiontrainingsessions. TheBoardalsoconsideredthelocationof AMB’sbranches.Twoof thebank’stwenty-one branchesareinmoderate-incometracts,andoneof theseisinaminoritytract.ABG assertsthatthebankplaceditsbranchesindowntownareaswithlargeworkforcepopulations,inshoppingareasthatattractpeoplefromthroughoutthemarket,andonmajor thoroughfares. Thecreditneedsof Bank’scommunitieswillbenefitfromAMB’sfinancialstrength,and theproposedacquisitionwillprovideBank’scustomerswithamoreviablesourceof bankingservices.ABGplanstocontinuetoofferBank’sproductsandtoreplaceanydiscontinuedproductsandserviceswithsimilarofferingsbyAMB. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof AMBandBank,informationprovidedbyABG,publiccomments receivedontheproposal,andconfidentialsupervisoryinformation,includingcurrent recordsof compliancewithconsumerlawsandregulations. Basedonareviewof theentirerecord,andforthereasonsdiscussedabove,theBoardhas concludedthatconsiderationsrelatingtotheconvenienceandneedsfactorandtheCRA performancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwith approval. 24 AlthoughtheHMDAdatamayreflectdisparitiesintheratesofloanapplications,originations,anddenials amongmembersofdifferentracialorethnicgroupsincertainlocalareas,theyprovideaninsufficientbasisby themselvesonwhichtoconcludewhetherornotAMBisexcludinganygrouponaprohibitedbasis.TheBoard recognizesthatHMDAdataalone,evenwiththerecentadditionofpricinginformation,provideonlylimited informationaboutthecoveredloans.HMDAdata,therefore,havelimitationsthatmakethemaninadequate basis,absentotherinformation,forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingand believesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpracticesarebasedoncriteriathat ensurenotonlysafeandsoundlendingbutalsoequalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholdingcompaniesandtheiraffiliatesmust conducttheirmortgagelendingoperationswithoutanyabusivelendingpracticesandincompliancewithall consumerprotectionlaws.
LegalDevelopments:FirstQuarter,2012 237 C.FinancialStability TheBoardhasalsoconsideredinformationrelevanttoriskstothestabilityof theUnited Statesbankingorfinancialsystem.Theproposedinvestmentrepresentsademinimistransactionforfinancialstabilitypurposes,andtheproposedtransactionwouldnotmaterially increasetheinterconnectednessorcomplexityof ABG.TheBoard,therefore,concludes thatfinancialstabilityconsiderationsinthisproposalareconsistentwithapproval. Basedonallthefactsof record,includingthosedescribedabove,theBoardhasdetermined thatallof thefactorsitmustconsiderundersection3(c)of theBHCActareconsistent withapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyABGwithalltheconditionsimposedinthisorderandthecommitments madetotheBoardinconnectionwiththeapplication,includingreceiptof allrequired regulatoryapprovals.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Dallas,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMarch21,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. JenniferJ.Johnson Secretaryof theBoard Orders Issued Under Section 4 of the Bank Holding Company Act Capital One Financial Corporation McLean, Virginia OrderApprovingtheAcquisitionof aSavingsAssociationandNonbankingSubsidiaries FRBOrderNo.2012-2(February14,2012) CapitalOneFinancialCorporation(“CapitalOne”),afinancialholdingcompanywithin themeaningof theBankHoldingCompanyAct(“BHCAct”),hasrequestedtheBoard’s approvalundersections4(c)(8)and4(j)of theBHCActandsection225.24of theBoard’s RegulationY1toacquireINGBank,fsb(“FSB”),Wilmington,Delaware,andthereby 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24.
238 FederalReserveBulletin|October2012 indirectlyacquireShareBuilderAdvisors,LLC(“ShareBuilder”)andINGDirectInvesting, Inc.(“IDII”),bothof Seattle,Washington.2 CapitalOne,withtotalconsolidatedassetsof approximately$200billion,isthe24thlargest depositoryorganizationintheUnitedStatesmeasuredbyassetsize.CapitalOneisthe eighthlargestdepositoryorganizationintheUnitedStatesmeasuredbydeposits,controllingdepositsof approximately$127billion,whichrepresentsapproximately1.4percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.3CapitalOnecontrolstwoinsureddepositoryinstitutions,CapitalOne,NationalAssociation (“CONA”),McLean,Virginia,andCapitalOneBank(USA),NationalAssociation (“COBNA”),GlenAllen,Virginia,thatoperateineightstatesandtheDistrictof Columbia.4 FSB,withtotalconsolidatedassetsof approximately$92billion,isthe17thlargestdepositoryorganizationintheUnitedStatesmeasuredbydeposits,controllingdepositsof approximately$82billion,whichrepresentslessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.FSB’sonlybankingoffice isinDelaware,butFSBsolicitsbusinessandoperatesnationwideprimarilythroughthe Internet.5 Onconsummationof theproposal,CapitalOnewouldbecomethefifthlargestdepository organizationintheUnitedStatesbydepositsize,withconsolidateddepositsof approximately$210billion,representingapproximately2.3percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.CapitalOnewouldbecomethe20th largestdepositoryorganizationintheUnitedStatesbyassetsize,withtotalconsolidated assetsof approximately$292billion. PublicCommentontheProposal Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(76FederalRegister44,008(July22,2011)and 76FederalRegister54,770(September2,2011)),andthetimeforfilingcommentshas expired.TheBoardextendedtheinitialperiodforpubliccommenttoaccommodatethe broadpublicinterestinthisproposal,providinginterestedpersonsmorethan85daysto submitwrittencomments. Becauseof theextensivepublicinterestintheproposal,theBoardheldpublicmeetingsin Washington,D.C.,Chicago,Illinois,andSanFrancisco,California,toprovideinterested personsanopportunitytopresentoraltestimonyonthefactorsthattheBoardmustreview undertheBHCAct.6Approximately235peopletestifiedatthepublicmeetings,andmany of thecommenterswhotestifiedalsosubmittedwrittencomments. 2 FSBisownedbyINGGroepN.V.(“INGGroep”),Amsterdam,TheNetherlands.In2008and2009,thegovernmentofTheNetherlandsprovidedINGGroepaguaranteeofsomeofINGGroep’sassets,including certainU.S.assetsofFSB.Underthisproposal,CapitalOnewouldnotacquireanyFSBassetsthataresubject totheguaranteeoftheDutchgovernment. 3 AssetandnationwidedepositrankingdataareasofSeptember30,2011.Inthiscontext,insureddepository institutionsincludecommercialbanks,savingsbanks,andsavingsassociations. 4 CONAisCapitalOne’slargestsubsidiarydepositoryinstitutionasmeasuredbybothassetsanddeposits. COBNAprimarilyofferscreditanddebitcardproductsinadditiontodepositproducts. 5 FSBoperateseightcafésintheUnitedStatesthataremarketingofficesofFSBanddonotmeetthedefinition of“branch”undertheregulationsoftheOfficeofThriftSupervision(“OTS”)andOfficeoftheComptroller oftheCurrency(“OCC”).See76FederalRegister48,999(August9,2011),tobecodifiedat12CFR145.92. 6 TheBoardheldtheWashingtonpublicmeetingonSeptember20,2011,theChicagopublicmeetingonSeptember27,2011,andtheSanFranciscopublicmeetingonOctober5,2011.Severalcommentersrequestedthatthe BoardfurtherextendthecommentperiodandholdadditionalpublicmeetingsinNewYorkCity,LosAngeles,
LegalDevelopments:FirstQuarter,2012 239 Intotal,approximately915individualsandorganizationssubmittedcommentsontheproposalthroughoraltestimony,writtencomments,orboth.Commentersincludedmembers of Congress,statelegislators,communitygroups,nonprofitorganizations,customersof CapitalOneorFSB,andotherinterestedorganizationsandindividuals. Alargenumberof commenterssupportedtheproposal.Manyof thecommentersinsupportof theproposalcommendedCapitalOneforitscommitmenttolocalcommunitiesand describedfavorableexperienceswiththesmallbusiness,communitydevelopment,and affordablemortgageprogramsof theorganization.Commentersalsopraisedthewillingnessof CapitalOnetoprovideproductsandservicesundertheCommunityReinvestment Act(“CRA”),7suchasaffordablemortgageproducts,educationalseminars,andfundsto supportcommunitydevelopmentactivities.Inaddition,commenterspraisedCapitalOne’s charitablecontributionsandnotedthatCapitalOneofficersandemployeesfrequentlyprovidevaluableservicestocommunityorganizationsasboardmembersandvolunteers. Asignificantnumberof commentersopposedtheproposal,requestedthattheBoardonly approvetheproposalsubjecttocertainconditions,orexpressedconcernsabouttheproposal.8Manycommentersexpressedconcernabouttheimpactof theproposalonthe financialstabilityof theU.S.bankingorfinancialsystem.Commentersalsoexpressedtheir belief that,if approvedbytheBoard,CapitalOne’sacquisitionof FSBwouldresultin adverseeffectsthatwouldoutweighthepublicbenefitsprovidedbytheproposal. Asignificantnumberof commenterscriticizedtheperformanceof CapitalOneandFSB undertheCRA.Someof thecommenterscriticizedthecompliancerecordsof themortgagelendingoperationsof CapitalOneandFSBandexpressedconcernabouttheirrecords of lendingtominorities.CommentersalsocriticizedCapitalOne’sperformancerecordof lendingtosmallbusinessesandtherecordof itscreditcardlendingoperations.Inaddition, commentersexpressedconcernabouttheimpactof theacquisitiononCapitalOne’scommitmenttoCRA-relatedinitiativesanditsfutureperformanceundertheCRA.CommentersalsonotedconcernaboutCapitalOne’sproposedacquisitionof creditcardassetsfrom subsidiariesof HSBCHoldingsplc(“HSBC”),London,UnitedKingdom,andrequested thattheBoardreviewthetwoproposalstogetherorrequireanapplicationfromCapital Onetoacquirethoseassets,toensurethattheHSBCproposalistakenintoconsideration inconnectionwiththereviewof theCRA,financialstability,andotherfactorsrelatedto theFSBproposal.9 InevaluatingthestatutoryfactorsundertheBHCAct,theBoardconsideredtheinformationandviewspresentedbyallcommenters,includingthetestimonyatthepublicmeetings andinthewrittensubmissions.10TheBoardalsoconsideredalltheinformationpresented Atlanta,NewOrleans,andothercommunities.TheBoardbelievesthatholdingpublicmeetingsinWashington, Chicago,andSanFrancisco,aswellasprovidingallcommentersanextendedperiodtosubmitwrittencomments,providedsufficientopportunityforinterestedpersonstoproviderelevantinformationtotheBoard.The threepublicmeetingsweredistributedacrosstheUnitedStates,andasnotedabove,thewrittencomment periodexceeded85days. 7 12U.S.C.§2901etseq. 8 Approximately425commentsweresubmittedintheformofsubstantiallyidenticalletters. 9 CapitalOnehasappliedtotheOCCforapprovalundertheBankMergerActtoacquirevariousassetsfrom HSBC.TheOCCisrequiredtotakeintoconsiderationthesamefactorsthatarereviewedbytheBoardunder theBHCAct,includingtheeffectsoftheacquisitiononfinancialstabilityandontheconvenienceandneedsof thecommunitytobeserved.12U.S.C.§1828(c)(5).AlthoughCapitalOneisnotrequiredbylawtoapplyfor approvalbytheFederalReservetoacquiretheHSBCassets,CapitalOnehasprovidedinformationtothe BoardregardingtheproposedacquisitionofHSBC’sassets.TheBoardhastakenthisinformationintoaccount forpurposesofitsreviewofthefactorsitmustconsiderwithrespecttoCapitalOne’snoticetoacquireFSB. 10 Onecommenterexpressedconcernaboutexpartecommunicationsandtheopportunityforthepublictorebut allinformationthatwasprovidedbyCapitalOne.Onreview,theBoardfoundthatthepublichadafullopportunitytoprovidetheBoardwithanyinformationrelatedtothefactorsthattheBoardmustconsiderinacting
240 FederalReserveBulletin|October2012 inthenoticeandsupplementalfilingsbyCapitalOne;variousreportsfiledbytherelevant companies;publiclyavailableinformation;andotherinformationandreports.Inaddition, theBoardreviewedconfidentialsupervisoryinformation,includingexaminationreportson thedepositoryinstitutionholdingcompaniesandthedepositoryinstitutionsinvolvedand informationprovidedbyotherfederalfinancialsupervisoryagencies,theDepartmentof HousingandUrbanDevelopment(“HUD”),andtheDepartmentof Justice(“DOJ”). Afterareviewof allthefactsof record,andforthereasonsdiscussedinthisorder,the BoardhasconcludedthatthestatutoryfactorsitisrequiredtoconsiderundertheBHC Actareconsistentwithapprovalof theproposal. FactorsGoverningBoardReviewof theTransaction TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyandtheothernonbankingactivitiesforwhichCapital Onehasrequestedapprovalarecloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.11TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesorfinancialholdingcompaniesconformtheirdirectandindirectactivitiesto thosepermissibleforbankholdingcompaniesundersection4(c)(8)of theact.12Capital Onehascommittedthatalltheactivitiesof FSBandtheothernonbankingsubsidiariesof FSBthatitproposestoacquirewillconformtothoseactivitiesthatarepermissibleunder section4of theBHCActandRegulationY. Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof FSBanditsnonbankingsubsidiaries“canreasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsin efficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources, decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisk tothestabilityof theUnitedStatesbankingorfinancialsystem.”13Aspartof itsevaluationof thesefactors,theBoardreviewsthefinancialandmanagerialresourcesof thecompaniesinvolved,theeffectof theproposaloncompetitionintherelevantmarkets,therisk tothestabilityof theUnitedStatesbankingorfinancialsystem,andthepublicbenefitsof theproposal.14Inactingonanoticetoacquireasavingsassociation,theBoardreviewsthe recordsof performanceof therelevantinsureddepositoryinstitutionsundertheCRA.In casesinvolvingtheinterstateacquisitionof aninsureddepositoryinstitutionundersection4(c)(8)of theBHCAct,theBoardmustalsoconsidertheconcentrationof depositson anationwidebasis.15 InterstateandDepositCapAnalyses TheDodd-FrankActamendedsection4of theBHCActtoprovidethat,ingeneral,the Boardmaynotapproveanapplicationbyabankholdingcompanytoacquireaninsured onthenotice.TheinformationsubmittedbyCapitalOne,andthereleaseofthatinformationtothepublic,was inaccordancewiththeBoard’sregulationsandpolicies.TheBoardconfirmedthatallcontactsbetweenCapitalOneandstaffwereinaccordancewiththeBoard’srulesonexpartecommunications. 11 12CFR225.28(b)(4),(6),and(7). 12 Asavingsassociationoperatedbyabankholdingcompanymayengageonlyinactivitiesthatarepermissible forbankholdingcompaniesundersection4(c)(8)oftheBHCAct.12CFR225.28(b)(4). 13 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankWallStreetReformandConsumerProtectionAct of2010,Pub.L.No.111–203,124Stat.1601(2010),(“Dodd-FrankAct”)addedthe“risktothestabilityofthe UnitedStatesbankingorfinancialsystem”tothelistofpossibleadverseeffects. 14 See12CFR225.26;see,e.g.,BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008) (“BankofAmericaOrder”);WachoviaCorporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83FederalReserveBulletin602(1997). 15 12U.S.C.§1843(i)(8).
LegalDevelopments:FirstQuarter,2012 241 depositoryinstitutionif thehomestateof theinsureddepositoryinstitutionisastateother thanthehomestateof thebankholdingcompany,andtheapplicantcontrolsorwould controlmorethan10percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates(“nationwidedepositcap”).16Theintendedpurposeof the nationwidedepositcapwastohelpguardagainstundueconcentrationsof economic power.17Forpurposesof theBHCAct,thehomestateof CapitalOneisVirginia,andthe homestateof FSBisDelaware.18 Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutionsinthe UnitedStates,thetotalamountof depositsof insureddepositoryinstitutionsis$8.9trillion.19Onconsummationof theproposedtransaction,CapitalOnewouldcontrolapproximately2.3percentof thetotalamountof depositsininsureddepositoryinstitutionsinthe UnitedStates.Accordingly,inlightof allthefactsof record,theBoardisnotrequiredto denytheproposalundersection4(i)of theBHCAct. CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardhasconsideredthecompetitiveeffectsof CapitalOne’sacquisitionof FSBandits nonbankingsubsidiaries,inlightof allthefactsof record.CapitalOne’ssubsidiarybanks andFSB’sdeposit-takingandlendingoperationsarelocatedindifferentbankingmarkets. Basedonallthefactsof record,includingthedifferencesinbusinessmodels,products,and methodsforprovidingservicestoconsumers,theBoardhasconcludedthattheacquisition byCapitalOneof FSB’sdeposit-takingandlendingoperationswouldnotresultinanysignificantadverseeffectoncompetitioninanyrelevantbankingmarket. TheBoardalsohasconsideredthecompetitiveeffectsof CapitalOne’sproposedacquisitionof FSB’sothernonbankingsubsidiariesandactivitiesinlightof allthefactsof record.20CapitalOneandFSBbothengageininvestmentadvisoryandsecuritiesbroker- 16 Dodd-FrankAct§623(b),codifiedat12U.S.C.§1843(i)(8).Foradetaileddiscussionofthenationwidedeposit cap,seeBankofAmericaCorporation/LaSalle,93FederalReserveBulletinC109,C109-C110(2007);Bankof AmericaCorporation/Fleet,90FederalReserveBulletin217,219-220(2004)(“FleetOrder”). 17 FleetOrderat219. 18 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.12U.S.C.§1841(o)(4)(C).Forafederalsavingsassociation,thehomestateisthestatein whichthehomeofficeofthesavingsassociationislocated.12U.S.C.§1841(o)(4)(E). 19 SeeFleetOrderat219.Depositdataarecalculatedbasedonreportsfiledbyinsureddepositoryinstitutions andareasofSeptember30,2011.EachbankinsuredbytheFederalDepositInsuranceCorporation(“FDIC”) intheUnitedStatesmustreportdataregardingitstotaldepositsinaccordancewiththedefinitionof“deposit” undertheFederalDepositInsuranceAct,12U.S.C.§1813(l),ontheinstitution’sConsolidatedReportofConditionandIncome.Eachinsuredsavingsassociationsimilarlymustreportitstotaldepositsontheinstitution’s ThriftFinancialReport.DepositdataforFDIC-insuredU.S.branchesofforeignbanksandfederalbranches offoreignbanksareobtainedfromtheReportofAssetsandLiabilitiesofU.S.BranchesandAgenciesofForeignBanks.ThesedataarereportedquarterlytotheFDICandarepubliclyavailable. 20 Underthe2010HorizontalMergerGuidelines(“Guidelines”)issuedbytheDOJandtheFederalTradeCommission,thepostmergerlevelofmarketconcentrationandthechangeinconcentrationresultingfromamerger areimportantfactorsinevaluatingtheeffectofthemergeroncompetition.Marketsharesalonemaynotfully reflectthecompetitivesignificanceoffirmsinthemarketortheimpactofamergerandareusedinconjunctionwithotherevidenceofcompetitiveeffects. TheGuidelinesusetheHerfindahl-HirschmanIndex(“HHI”)asameasureofconcentration.Formergersthat donotinvolvebanks,theGuidelinesstatethatmergersresultinginunconcentratedmarketsareunlikelytohave adversecompetitiveeffectsandordinarilyrequirenofurtheranalysis.TheGuidelinesalsostatethatmergers involvinganincreaseintheHHIoflessthan100pointsareunlikelytohaveadversecompetitiveeffectsand ordinarilyrequirenofurtheranalysis.PressRelease,DepartmentofJustice,August19,2010,www.justice.gov/ opa/pr/2010/August/10-at-938.html.
242 FederalReserveBulletin|October2012 ageservicesthroughsubsidiariesthatareregisteredbroker-dealers.21TheBoardpreviously hasdeterminedthattheseactivitiesarepermissibleforbankholdingcompanies.22 CapitalOneandFSBcompeteinthesecuritiesbrokeragebusiness.23TheBoardpreviously hasdeterminedthatthegeographicmarketforsecuritiesbrokerageiseitherregionalor nationalinscope.24Onconsummationof theproposal,thesecuritiesbrokeragemarket wouldremainunconcentrated,andnumerouscompetitorswouldcontinuetoengageinthe securitiesbrokeragebusiness. CapitalOneandFSBalsocompeteintheinvestmentadvisorybusiness.25TheBoardpreviouslyhasdeterminedthatthegeographicmarketforinvestmentadvisoryservicesiseither regionalornationalinscope.26Therecordinthiscaseindicatesthattherearenumerous competitorsthatwouldcontinuetoengageintheinvestmentadvisorybusinessonconsummationof theproposalandthatCapitalOne’sandFSB’slevelsof participationarerelativelysmall. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposed transactionwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingornonbankingactivitiesmarketandisconsistentwithapproval. FinancialandManagerialResources TheBoardconsideredthefinancialandmanagerialresourcesof CapitalOne,FSB,and theirsubsidiariesandtheeffectof thetransactiononthoseresources,inlightof confidentialreportsof examination,othersupervisoryinformationfromtheprimaryfederalsupervisorof theorganizationsinvolvedintheproposal,publiclyreportedandotherfinancial information,informationprovidedbyCapitalOneandFSB,andotherrelevantinformation.TheBoardalsoconsultedwiththeOCCastheprimaryfederalsupervisorof Capital One’ssubsidiarydepositoryinstitutionsandFSB. Inaddition,theBoardconsideredthepubliccommentsthatrelatetothesefactors.As notedabove,theBoardreceivedanumberof commentsrequestingthatitconsiderthecurrentproposalinlightof CapitalOne’sproposedacquisitionof assetsfromsubsidiariesof HSBC.Commentersassertedthattheseproposalsrepresentunsoundbankingpractices 21 AlthoughbothCapitalOneandFSBcurrentlyowninsurancesubsidiaries,FSB’sinsurancesubsidiary,ING DirectInsuranceAgency,LLC,isinactiveanddidnotengageinanysalesactivityin2010or2011.Accordingly, thereisnooverlapincompetitionbetweenCapitalOneandFSBinprovidinginsuranceservices. 22 See12CFR225.28(b)(7). 23 CapitalOnehastworegisteredbroker-dealers:CapitalOneSouthcoast,Inc.,whichisafull-serviceinvestment bankingfirmthatprovidescorporatefinance,equityresearch,andinstitutionalequitysalesandtradingservices;andCapitalOneInvestmentServicesLLC,whichoffersservicestoretailinvestors.FSBownsIDII,which isanInternet-basedbroker-dealerthatprovidesbrokerageservicestoretailinvestorsandemployer-sponsored 401(k)plans. 24 SeeBankofAmericaOrderatC86;AlliedIrishBanks,p.l.c.,94FederalReserveBulletinC11(2007);Wachovia Corporation,92FederalReserveBulletinC183(2006);Marshall&IlsleyCorporation,92FederalReserveBulletin C121(2006);WellsFargo&Company,88FederalReserveBulletin103(2002);andNationsBankCorporation,84 FederalReserveBulletin858(1998). 25 CapitalOnehastworegisteredinvestmentadvisors:CapitalOneFinancialAdvisors,whichdistributesthirdpartyinvestmentmanagementproductsthroughCapitalOne’sbranchnetwork;andCapitalOneAssetManagement,whichprovidesinvestmentadvisoryservicestocertainclientsofCONA.FSBindirectlyownsShare- Builder,aregisteredinvestmentadvisorthatcreatesexchange-tradedfundsforconsiderationbyretail brokeragecustomersofIDII.ShareBuilderdoesnotofferpersonalizedinvestmentadvice. 26 SeeMarshall&IlsleyCorporation,92FederalReserveBulletinC121(2006);SunTrustBanks,Inc.,90Federal ReserveBulletin533(2004);andFifthThirdBancorp,87FederalReserveBulletin330(2001).
LegalDevelopments:FirstQuarter,2012 243 thatwouldallowCapitalOnetoacquirehigh-costdepositsfromFSBtofundtheoriginationandacquisitionof subprimecreditcardassets. Inevaluatingfinancialresourcesinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiaryinsured depositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthis evaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,asset quality,andearningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhas consideredcapitaladequacytobeespeciallyimportant.TheBoardevaluatesthefinancial conditionof thecombinedorganizationatconsummation,includingitscapitalposition, assetquality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions. TheBoardhasconsideredthefinancialfactorsof theproposal.CapitalOne’sregulatory capitalratiosarewellabovetheminimumsrequiredof well-capitalizedbankholdingcompaniesandwouldremainsoonconsummationof theproposal.CapitalOne’ssubsidiary depositoryinstitutionsandFSBalsoarewellcapitalizedandwouldremainsoafterconsummation.Theproposedtransactionisstructuredasacashandshareexchange.Capital OnewouldacquireFSBfromINGGroepinexchangeforapproximately$6.2billionin cashand55.9millionCapitalOnecommonshares,valuedatapproximately$2.8billion.27 CapitalOnerepresentedthatthecashportionof thepurchasepriceof FSBwouldbe fundedwiththeproceedsfromthesaleof $2billionof additionalsharesandtheissuance of $3billionof seniorunsecureddebt,28withtheremaining$1.2billiontobefundedfrom availablecashresources.Thistransactionwouldnotmateriallyincreasethedebtservice requirementsof thecombinedcompany.29Assetqualityandearningsprospectsalsoare consistentwithapproval.30 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof CapitalOne,itssubsidiarydepositoryinstitutions,andFSB,includingassessmentsof their managementexpertise,internalcontrols,riskmanagementsystems,andoperations.In 27 TheCapitalOnecommonsharestobeacquiredbyINGGroeprepresentapproximately9.6percentofCapital One’svotingshares.OnecommenterassertedthatINGGroepmustfileanapplicationforcontrolofmore than4.9percentofCapitalOne’svotingstock.ThecommenteralsoarguedthatINGGroepwouldcontrol CapitalOnebyvirtueofitsownershipofupto9.9percentofCapitalOne’svotingshares.Theseassertionsare notlegallycorrectinthiscase.Asaresultoftheproposal,INGGroepwouldnolongercontrolasavingsassociationand,consequently,wouldnolongerbearegulatedsavingsandloanholdingcompanyorbankholding company.Assuch,INGGroepwouldnotrequiretheBoard’sapprovaltoacquireupto9.9percentofthevotingstockofCapitalOne.Inaddition,theBoardhasdeterminedinaseparateactionthatINGGroepwould notcontrolCapitalOneasaresultofthisproposal.SeeBoardlettertoMarkMenting,Esq.(February14, 2012). 28 InJuly2011,CapitalOneenteredintoforwardsaleagreementstotaling$2billioninconnectionwithapublic offeringof40millioncommonshares.AlsoinJuly2011,CapitalOneclosedapublicofferingof$3billion ofseniorunsecurednotes.CapitalOnerepresentedthatitexpectstousetheproceedsoftheforwardsaleagreementsandthedebtofferingtofundtheproposedacquisitionofFSB. 29 Inreviewingthefinancialfactorsinthiscase,theBoardhastakenaccountofCapitalOne’splantoacquirecertainassetsfromHSBCandtofundtheacquisitionofHSBCassetsprimarilywithcashandtheproceedsfrom therepositioningofFSB’sbalancesheet.Inaddition,CapitalOneexpectstoissueadditionalequity,including upto$750millioninequitythatCapitalOnehastheoptiontoissuetoHSBC. 30 SeveralcommentersexpressedconcernthatCapitalOne’sassetportfolioishighlyconcentratedincreditcards, includingasubstantialamountofsubprimecreditcardassets.TheBoardbelievesthatCapitalOnehasthe financialandmanagerialresourcestomanageitsassetportfolio.CapitalOnelendsacrossafullspectrumof borrowers,anditsoverallbusinessisdiversified.CapitalOnehassubstantiallydecreaseditsrelianceoncredit cardrevenuesince2005.Currently,creditcardloansrepresentapproximately48percentofCapitalOne’sloan portfolioandapproximately28percentofthecompany’stotalassets.
244 FederalReserveBulletin|October2012 addition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevant financialsupervisoryagencieswiththeorganizationsandtheorganizations’recordsof compliancewithapplicablebankinglawsandwithanti-money-laundering(“AML”)laws.31 CapitalOneanditssubsidiarydepositoryinstitutionsareconsideredtobewellmanaged. CapitalOnehasademonstratedrecordof successfullyintegratinglargeorganizationsinto itsoperationsandrisk-managementsystemsfollowingacquisitions,includingitsintegrationsof HiberniaCorporationin2005,NorthForkBancorporationin2006,andChevy ChaseBankin2009.CapitalOneisdevotingsignificantfinancialandotherresources toaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.Capital Onewouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization.Inaddition,CapitalOne’smanagementhastheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner. TheBoardalsohasconsideredcommentsthatallegeweaknessesinCapitalOne’scompliancemanagementasitrelatestoconsumerprotectionpractices.Commenterscriticized CapitalOneforattemptingtocollectcreditcarddebtsfromcustomerswhosedebtspreviouslyhadbeendischargedinbankruptcy,32notcomplyingwithlawsgoverningrepossessionof automobiles,33notfollowingstateandfederallawsthatprotectexemptincome fromdebtcollection,34andfailingtocomplywithfairlendinglaws,amongothermatters.35 TheBoardbelievesthatitisappropriateinconnectionwiththeacquisitionof FSBfor CapitalOnetoenhanceitsrisk-managementsystemsandpoliciestoaccountforthesize, complexity,anddiversificationof thebusinesslinesthatwouldresultfromtheacquisition of FSB.ToensureminimaldisruptiontoFSB’scustomersandmaintainfocusonriskmanagementduringtheintegration,CapitalOnehascommittedthatitwillensuretheadequate completionof theintegrationof FSBaswellastheHSBCportfolio,referencedabove,ina timelymannerconsistentwithsupervisoryexpectations. Inaddition,theBoardexpectsthatCapitalOnewillensurethatitsriskmanagementframeworkandmethodologies,includingitscompliancefunctions,arecommensuratewithits newsizeandcomplexity.ThevariousconsumercomplaintsandlegalactionsagainstCapitalOnereferencedinthisordersuggestthatCapitalOne’sprocessesandproceduresfor 31 OnecommentercontendedthatINGGroepandFSBarebeingreviewedbyU.S.authorities,includingthe DOJ,forpossibleviolationsofAMLandeconomicsanctionslaws.INGGroephasrepresentedthatthese reviewsfocusonINGBankN.V.,Amsterdam.CapitalOnerepresentedthatitplanstointegrateitscorporate complianceprogramatFSBandeachofitssubsidiaries,thatithasbeguntoengageinfullassessmentsof FSB’sAMLandeconomicsanctionsprogramsinordertoimmediatelymanagecompliancebyCapitalOne andFSBatconsummation,andthatitplanstointegratetheorganizations’differentcomplianceprocessesover time. 32 Inearly2007,CapitalOnedeterminedthatithadinadvertentlyfiledproofsofclaimondischargeddebts.CapitalOnecooperatedwithaU.S.bankruptcytrustee’sinvestigationand,pursuanttoaNovember2008consent order,retainedanindependentauditortooverseeareviewofitsproofsofclaimtodeterminewhetherCapital Onehadfiledclaimsonpreviouslydischargeddebts.CapitalOneaddressedthisissuebyretaininganoutside vendortoperformanadditionalreviewinadvanceofanyfilingofaclaimbyCapitalOne.CapitalOnerepresentedthatthecourt-mandatedauditorhasrevealedthattheerrorrateinfilingproofsofclaimdroppedsignificantlyaftertheoutsidevendorwasretained.CapitalOnepaid$2.35millioninrestitutiontoaffectedcustomers.TheFederalReservewillusethesupervisoryandexaminationprocesstoensuretheeffectivenessofthe debtcollectionpracticesandprogramsadoptedbyCapitalOne. 33 CapitalOnehassettledseveralclassactionlawsuitsregardingitsautomobilerepossessionpracticespriorto 2008.CapitalOnecorrectederrorsinitsautomobilefinanceprocessingsystemsin2008byfullyintegratingsystemsfromitsacquisitionsofHiberniaCorporationandNorthForkBancorporation. 34 CapitalOnerepresentedthatinmid-2011,asmallnumberofdepositorshadbeenimproperlysubjectedtogarnishmentordersrequestedbyCapitalOne.CapitalOnesubsequentlytookcorrectivestepstoprovideremediationtothedepositorsandtoimplementnewprocessesandcontrolstopreventimpropergarnishment requests. 35 CommentsrelatingtofairlendingcompliancearediscussedinOtherConsiderations,infra.
LegalDevelopments:FirstQuarter,2012 245 enterprise-widecompliancetransactiontestingcouldbeimproved.Accordingly,theBoard conditionsitsdecisiononCapitalOneaugmentingtheseprocessesandproceduresby adoptingaplanwithin90daysacceptabletotheFederalReserveBankof Richmondthat specifiestheareasinwhichtransactiontestingwillbeconducted,thetypeof testingappropriateforeacharea,andanappropriatesamplingmethodology;addressesthefrequency andscopeof compliancetransactiontesting;providesforperiodicreportingtomanagementandtheAuditandRiskCommitteeof theboardof directors;providesforimproved employeetraining;andincludesrequirementsforatleastanannualreviewbyinternalaudit of thetestingimplementationforatleastthenextthreeyears.Compliancewiththisconditionwillbemonitoredaspartof thesupervisoryprocess. Basedonallthefactsof record,includingareviewof thecommentsreceived,andinrelianceonthecommitmentsandconditionsdiscussedabove,theBoardhasconcludedthat considerationsrelatingtothefinancialandmanagerialresourcesof theorganizations involvedintheproposalareconsistentwithapprovalundersection4of theBHCAct. Recordsof PerformanceUndertheCRA Asnotedpreviously,theBoardreviewstherecordsof performanceundertheCRAof the relevantinsureddepositoryinstitutionswhenactingonanoticetoacquireanyinsured depositoryinstitution,includingasavingsassociation.36TheCRArequiresthefederal financialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation,37andrequirestheappropriatefederalfinancialsupervisoryagencyto takeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglowandmoderateincome(“LMI”)neighborhoods,in evaluatingbankexpansionaryproposals.38 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformancerecordsof CapitalOne’ssubsidiarybanksandof FSB,datareportedby CapitalOneandFSBundertheCRAandtheHomeMortgageDisclosureAct (“HMDA”),39otherinformationprovidedbyCapitalOne,confidentialsupervisoryinformation,andpubliccommentsreceivedontheproposal.Asnotedabove,theBoardheld threepublicmeetingstoallowinterestedmembersof thepublicanopportunitytoprovide oraltestimonyregardingtheproposalinadditiontohavingtheopportunitytosubmitwritteninformationandviews.Asaresultof themeetingsandthroughthecourseof thepubliccommentperiod,theBoardreceivedapproximately915comments. Approximately340individuals,organizations,andbusinessessubmittedcommentsortestifiedinsupportof theproposal.ThesecommentersgenerallycommendedCapitalOne’s recordof performanceundertheCRA,particularlyitssupportforcommunitydevelopmentandsmallbusinessprograms,throughloans,investmentsandgrants,donatedspace, andcorporatevolunteers;itsbusinesseducationprogramstosmallbusinessowners,includinginLMIcommunities;itsdevelopmentof affordablehomepurchaseloansforborrowers inLMIcommunities;anditsotherprograms. Approximately575otherindividualsandgroupsexpressedconcernintheircommentsand testimonyaboutthemortgage,smallbusiness,andconsumerlendingrecordsof Capital 36 12U.S.C.§2901etseq. 37 12U.S.C.§2901(b). 38 12U.S.C.§2903. 39 12U.S.C.§2801etseq.
246 FederalReserveBulletin|October2012 OneandFSB;CapitalOne’sabilitytosatisfyitsCRAobligationsafterconsummationof theproposal;orrelatedmatters.40Amongthecriticismsmadebycommenterswerethat: ‰ CapitalOnehasnotengagedinanadequateamountof homemortgagelendingtoLMI andminorityborrowers. ‰ CapitalOnehasfailedtomeetthecommunitydevelopmentandsmallbusinessneedsin communitiesservedbybanksthatCapitalOnepreviouslyacquired.Someof thesecommentersassertedthatCapitalOnehadreduceditssmallbusinessloansinvariouscommunitiesandreplacedaffordableloanstosmallbusinesseswithhigher-costcreditcards. ‰ CapitalOne’slendinginCalifornia,especiallytominority-andwomenownedbusinesses,hasbeeninadequate. ‰ CapitalOneandFSBhavebeeninconsistentinmakingbranchesandservicesavailable toLMIcommunities. ‰ FSB’srecordof lendingtoLMIandminorityborrowersandFSB’scafélocationshave disproportionatelyexcludedLMIconsumers.41 A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasevaluatedtheproposalinlightof theexaminations bytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevant insureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluation isaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsa detailed,on-siteevaluationof theinstitution’soverallrecordof performanceunderthe CRAbyitsappropriatefederalsupervisor.42 CapitalOne’sleadbank,CONA,receivedan“outstanding”ratingatitsmostrecentCRA performanceevaluationbytheOCC,asof April4,2011(“CONAEvaluation).COBNA receiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbythe OCC,asof April4,2011(“COBNAEvaluation”).43 FSBreceivedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationby theOTS,asof August6,2008(“FSBEvaluation”).44CapitalOnehasrepresentedthatit willinstituteelementsof thecommunitydevelopmentandcommunityinvestmentpolicies of CONAandCOBNAatFSBtostrengthenFSB’sabilitytomeetthebankingneedsof thecommunitiesitserves.45 40 ManycommentersurgedtheBoardtorequireCapitalOnetoprovidespecificpledgesorplans,ortotakecertainfutureactions,oraskedtheBoardtoconditionitsapprovalonacommitmentbyCapitalOnetoprovide loansorinvestmentstospecificcommunities.TheBoardfocusesontheexistingCRAperformancerecord ofanapplicantandtheprogramsthatanapplicanthasinplacetoservethecreditneedsofitsassessmentareas atthetimetheBoardreviewsaproposal.SeeBankofAmericaOrderatC87. 41 TwocommentersalsoassertedthatFSBpersonnelcashchecksandotherwiseperformactivitiesthatqualify thosecafésasbranchesofFSB.CapitalOnehasrepresentedthatcafépersonnelcurrentlydonotcashchecks oracceptdeposits,and,consequently,thatthesecafésarenotbranchesofFSBundertheHomeOwners’Loan Act(“HOLA”),12U.S.C.§1461etseq.,andwerenotincludedintheOTSanalysisofFSB’srecordunderthe CRA.FourofthecafésareinLMIcensustracts,oneisinamiddleincometract,andthreeareinupperincometracts.CapitalOnehasrepresentedthatitintendstoadddeposit-takingATMsatFSB’scafésand expanditsCRAassessmentareastoincludetherelevantcommunitiesservedbythesecafés. 42 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,66FederalRegister11,642at 11,665(2010). 43 TheperiodfortheCONAEvaluationwasJanuary1,2007,throughDecember31,2010.COBNAisalimitedpurposebankforpurposesoftheCRA,anditisevaluatedunderthecommunitydevelopmenttest.Theperiod fortheCOBNAEvaluationwasMarch1,2008,throughDecember31,2010. 44 TheperiodfortheFSBEvaluationwasJanuary1,2005,throughDecember31,2007. 45 SeveralcommentersassertedthatCapitalOneshouldmeetthecreditneedsofLMIcustomersinCalifornia. TheCRArequiresabankorsavingsassociationtomeetthecreditneedsofthecommunitiesinwhichitoper-
LegalDevelopments:FirstQuarter,2012 247 CRAPerformanceof CONA.CONAisthelargestinsureddepositoryinstitutioncontrolled byCapitalOne,representingapproximately65percentof CapitalOne’sinsureddepository institutionassets.IntheCONAEvaluation,thebankreceived“outstanding”ratingsforthe lendingandinvestmenttestsanda“highsatisfactory”ratingfortheservicetest.CONA’s performanceintheNewYork-NorthernNewJersey-LongIslandMulti-StateMetropolitan Area(“NYMetroAA”),theWashington,D.C.Multi-StateMetropolitanArea(“D.C. MetroAA”),andtheStateof Louisiana(“LouisianaAA”)wasgivenconsiderablymore weightthanitsperformanceintheotherstatesthatarepartof CONA’sassessmentarea46 toreflectthefactthat90percentof thebank’sdepositsarebookedinbranchesinthose areas. ExaminersstatedthatCONAhadgoodlendingactivityandcharacterizeditsdistribution of loansamonggeographiesof differentincomelevelsasexcellent.47Examinersreported thatCONA’sdistributionof HMDA-reportablemortgageloansamongborrowersof differentincomelevelswasgood.48ExaminerscommendedCONA’scommunitydevelopment lending,whichtheydescribedasservingsignificantcommunitydevelopmentneeds.ExaminersalsostatedthatCONAexhibitedanadequatedistributionof loansamongborrowers of differentincomelevels.ExaminersnotedthatCONA’sbrancheswereaccessibletogeographiesandindividualsof differentincomelevelsandstatedthatproductinnovationand flexibilityhadapositiveimpactonthelendingtest.Inaddition,examinersnotedanexcellentlevelof communitydevelopmentinvestmentsthatwereresponsivetotheneedsof the bank’sassessmentareasandcommunitydevelopmentservicesthatwereresponsivetothe areas’needsaswell.ExaminersalsoreportedthatCONA’slevelof communitydevelopmentlendingsignificantlyenhanceditslendingtestperformance.49 ates,whichincludegeographiesoftheinstitution’smainoffice,itsbranches,anditsdeposit-takingATMs. 12CFRpart228;12CFRpart195.Asnotedabove,CapitalOneexpectstoaddservicestoFSB’scafésthat willcausethecaféstobebranchesforpurposesofHOLA,beginningwiththecafésinSanFranciscoandLos Angeles.Afterthecafésbecomebranches,CapitalOnewillberequiredundertheCRAtoprovidebanking productsandservicestoLMIcustomersinSanFranciscoandLosAngeles.12U.S.C.§2901etseq.;12CFR part195. SeveralcommentersalsosuggestedthattheBoarddelayactionontheproposaltoallowthefederalbanking agenciestopromulgateupdatedCRAregulationsthatwouldimposebroaderCRArequirementsoncompanies likeCapitalOneandFSBthatconductbusinessoutsidetheirbranchfootprints.TheBoardhasanalyzedthe proposalundertheexistingCRAregulationsandprocedures. 46 TheotherstatesareDelaware,Maryland,NewJersey,Texas,andVirginia. 47 SomecommentersallegedthatCapitalOne’sdepositoryinstitutionsubsidiariesdecreasedtheirhomemortgage lendingbetween2007and2009.TheBoardreviewedHMDAdatafor2008and2009,whichindicatethatCapitalOne’shomemortgageapplicationvolumedecreasednationwidebymorethan61percent.Thisdeclinewas attributabletogeneraleconomicconditionsandCapitalOne’sdecisionstoconcentrateondirectlendingandto closethelegacymortgagebusinessesofrecentlyacquiredNorthForkBankandChevyChaseBank,which focusedonbroker-originatedalternativemortgageproducts. 48 InCONA’sNYMetroAA,examinersgenerallyfoundthatthebank’slendinglevelswereexcellent.Theexaminersconcludedthatthedistributionofhomepurchase,homeimprovement,andhomerefinanceloanswas excellentandthatthedistributionofmultifamilyloanswasgood.IntheD.C.MetroAA,examinersfoundthat CONA’slendingactivitywasgood,thatthedistributionofhomepurchaseloansinLMIgeographieswasconsistentwiththenumberofowner-occupiedhousingunits,andthatthedistributionofhomeimprovementloans wasadequate.IntheLouisianaAA,examinersreportedthatCONA’slendingactivityandgeographicdistributionofhomemortgageloansandhomerefinanceloanswasgoodandthatthegeographicdistributionofhome purchaseloanswasexcellent.Thegeographicdistributionforhomeimprovementloanswasadequateinthis assessmentarea. 49 ExaminerscommendedCONA’scommunitydevelopmentlendingperformanceinLouisianaforbeingcomplex,innovative,andresponsivetotheneedsofthearea.IntheNYMetroAA,CONAoriginated300communitydevelopmentloanstotaling$1.1billionduringtheassessmentperiod.ExaminersalsopraisedCONA’s communitydevelopmentlendingintheD.C.MetroAAasdemonstratingahighlevelofresponsiveness. CONAmadeover$71millioninloanstorehabilitateaffordablehousingunitsintheD.C.MetroAA.
248 FederalReserveBulletin|October2012 Inaddition,examinersreportedthatCONA’sdistributionof smallbusinessloanswas good.50Asnotedabove,manycommentersexpressedconcernthatCapitalOnehad reduceditssmallbusinesslendingand,inparticular,allegedthatCapitalOnehadreplaced affordableloanstosmallbusinesseswithhigher-costcreditcards.AlthoughCapitalOne’s CRA-reportablesmallbusinessloanvolumedeclinedbymorethan81percentbetween 2008and2009(comparedwithadecreaseof 56percentforlendersintheaggregate),CapitalOneincreaseditsCRA-reportablesmallbusinessloanvolumebymorethan18percent in2010(comparedwithanadditionaldecreaseof morethan9percentforlendersinthe aggregate).Inaddition,thepercentageof CapitalOne’sCRA-reportablesmallbusiness loansthatweremadeinminorityorLMIcensustractsin2010exceededthatof lendersin theaggregate.TheBoardalsohasrevieweddataprovidedbyCapitalOneanddetermined thatcreditcardsaccountforasmallportionof itssmallbusinesslending.51 IntheCONAEvaluation,examinerscommendedthebank’sperformanceundertheinvestmenttest.Duringtheevaluationperiod,CONAmademorethan1,350investments,includinggrantsandcontributions,thattotaledmorethan$1billion.ExaminersalsocommendedCONA’sdemonstratedleadershipandresponsivenesstocommunitydevelopment needs.52Inaddition,examinersfoundthatCONAexhibitedleadershipandusedinnovative andcomplexmethodstocontinueinvestinginLowIncomeHousingTaxCredits (“LIHTC”).53 CONAreceivedanoverall“highsatisfactory”ratingundertheservicetestintheCONA Evaluation.ExaminersfoundthatCONA’sdistributionof brancheswasaccessibletogeographiesandindividualsof differentincomelevels.54Examinersreportedthatthebankprovidedagoodlevelof communitydevelopmentservicesandpraisedtheamountof time bankemployeesvolunteeredwithdifferentorganizations.55 CRAPerformanceof COBNA.56COBNA’soverallCRAratingwasloweredfrom“outstanding”to“satisfactory”asaresultof areviewof thebank’screditcardprogramthat 50 Inthiscontext,“smallbusinessloans”areloanswithoriginalamountsof$1millionorlessthateitherare securedbynonfarm,nonresidentialpropertiesorareclassifiedascommercialandindustrialloans.Inboththe NYMetroAAandtheLouisianaAA,examinersnotedthatthepercentageofloanstosmallbusinessesinLMI areasexceededthepercentageofsuchbusinessesinthesegeographies. 51 CapitalOnerepresentedthatitdoesnotmarketsmallbusinesscreditcardstoapplicantswhoaredeniedtraditionalsmallbusinessloans. 52 ExaminersstatedthatCONAdemonstratedexceptionallevelsofcommitmentandleadershipinsupportingthe LouisianaAA’srecoveryfromthedevastationofHurricanesKatrinaandRita.IntheLouisianaAA,CONA originatedorrenewed38communitydevelopmentloansandlinesofcredittotaling$338million. 53 CONAprovidedmorethan$70millioninLIHTCinvestmentsinaffordablehousingintheNYMetroAA.In 2010,CONAmade$20.4millioninLIHTCinvestmentsintheD.C.MetroAA.IntheLouisianaAA,CONA mademorethan$50millioninLIHTCinvestmentsthatincludedprovidingcriticalfinancingforalow-incomehousingprojectinJefferson,Louisiana,whenanotherlenderwasunabletofulfillitscommitment. 54 SomecommentersnotedthatinCONA’sCRAevaluationin2007,thebankreceiveda“lowsatisfactory”rating ontheservicetest.Atthattime,examinersreportedthatCONAlackedanappropriatedistributionofbranches andATMsinLMIcommunitiesinLouisianaandTexas.CapitalOnerepresentedthatthisratingwasattributabletoCapitalOne’sacquisitionofHiberniaBankin2005,whichhadnotinvestedsufficientlyinbuilding branchesinLMIcommunitiesinLouisianaandTexas.CapitalOnerepresentedthat,ofthe33newbranches CONAopenedinLMIareassince2007,19areinLouisianaandTexas. 55 IntheNYMetroAA,examinersfoundthatCONAprovidedanexcellentlevelofcommunitydevelopmentservicesandstatedthatbankemployeeswereinvolvedwith188differentorganizations.Examinersreportedthat intheD.C.MetroAA,CONAprovidedagoodlevelofcommunitydevelopmentservices,withamajorityof thoseservicesbeinggearedtowardcommunityservices,suchasprovidingfinancialeducationtostudents.In theLouisianaAA,examinersfoundthatthelevelofcommunitydevelopmentserviceswasgoodandthatbank employeeswereinvolvedwithmorethan200differentorganizations. 56 COBNA’sassessmentareaincludesallofHenricoCountyandtheCityofRichmond,bothinVirginia.COB- NA’scommunitydevelopmentstrategytargetedopportunitiesfirstwithinitsassessmentarea;thenwithinthe CommonwealthofVirginia,thesurroundingstates,andtheNortheastregion;andfinallyopportunitiesnation-
LegalDevelopments:FirstQuarter,2012 249 reflectedcertaindisclosureissuesidentifiedbyCOBNA.57Duringtheevaluationperiod, COBNAmademorethan$527millioninqualifiedinvestments.Examinersstatedthat COBNAdemonstratedahighlevelof qualifiedinvestmentsandcommunitydevelopment services.ExaminersfoundthatCOBNAmadeextensiveuseof complexorinnovative qualifiedinvestments,communitydevelopmentservices,andcommunitydevelopment loans.ExaminersalsofoundthatCOBNAdemonstratedexcellentresponsivenesstocommunitydevelopmentneedsinitsassessmentarea.58Inaddition,examinerspraisedbank personnelforprovidingapproximately5,000hoursof participationasmembersof boards of directorsandforprovidingfinancialandtechnicalexpertise. CRAPerformanceof FSB.Asnotedabove,FSBreceivedanoverall“outstanding”ratingin its2008CRAevaluation,witha“highsatisfactory”ratingonthelendingtestand“outstanding”ratingsonboththeinvestmentandservicetests.ExaminersnotedthatFSB’sdistributionof homemortgageloansreflectedgoodpenetrationof LMIgeographiesinits assessmentareaandinthesupplementalareasusedtoevaluateperformance.59Inaddition, examinersfoundthatFSB’slendingperformancetoborrowersof differentincomelevelsin itsassessmentareasandinthesupplementalareaswassatisfactory,consideringthebank’s nationwidelendingstrategyanduniquebranchlessplatform.Examinersnotedasignificant levelof qualifiedinvestmentsandgrantstocommunitydevelopmentorganizations,which showedagoodresponsivenesstocreditandcommunityeconomicdevelopmentneeds,particularlytheneedsof smallbusinesses.Inaddition,examinersfoundthatFSBwasaleader inprovidingaccesstocommunitydevelopmentservicesinitsassessmentareathrough alternativedeliverysystems,suchastheInternet,callcenters,andanetworkof ATMs. ExaminersalsocommendedFSBontherecordof itsemployeesinprovidingcommunity developmentservices. B.ConclusiononCRAPerformance TheBoardhasconsideredallthefactsof record,includingtheCRAperformancerecords of theinstitutionsinvolved,informationprovidedbyCapitalOne,commentsreceivedon theproposalandresponsestothosecomments,andconfidentialsupervisoryinformation. Basedonareviewof theentirerecord,andforthereasonsdiscussedabove,theBoardconcludesthattheCRAperformancerecordsof therelevantinsureddepositoryinstitutions areconsistentwithapprovalof theproposal. OtherConsiderations Initsevaluation,theBoardhasconsideredtherecordsof CapitalOneandFSBincomplyingwithfairlendingandotherconsumerprotectionlaws. wide.BecausetherewasagreatneedforqualifiedcommunitydevelopmentinvestmentsandlendingintheGulf CoastregionfollowingHurricanesKatrinaandRita,COBNAfocuseditscommunitydevelopmentopportunitiesinthatregion. 57 Theviolationsrelatedtocreditcarddisclosuresforaspecificadd-onproductofferedbetweenJanuary2004and April2010.COBNAidentifiedtheviolationinearly2010andhadprovidedrestitutiontoaffectedconsumers byJune2010. 58 COBNAinvested$25.5millionin5LIHTCdevelopments,creating654unitsofaffordablehousingforLMI individuals. 59 FSB’sassessmentareaconsistsofthePhiladelphia-Camden-WilmingtonMetropolitanStatisticalArea(or “MSA”).FSB’sSupplementalMSAsincludeMSAsthatencompassmanylargeandmidsizecitiesacrossthe UnitedStates,includingWashington,D.C.,SanFrancisco,Chicago,LosAngeles,Phoenix,andDenver.
250 FederalReserveBulletin|October2012 A.HMDAAnalysis TheBoardhasreviewedHMDAdatafrom2008,2009,and2010reportedbyCONAand FSBandtheirlendingaffiliates.60SeveralcommentersallegedthatCapitalOneandFSB deniedthehomemortgageloanapplicationsof minorityborrowersmorefrequentlythan thoseof nonminorityapplicantsincertainMSAs.61TheHMDAdataindicatethat,with theexceptionof certainareasoutsideCONA’sbranchfootprint,thepercentageof CONA’s applicationsfromandoriginationstominorityborrowers,LMIborrowers,andborrowers inpredominantlyLMIareasgenerallyexceededthepercentageforlendersintheaggregate. Inaddition,thedataindicatethatCONAdidnotexhibitahigherdenialrateforminority applicantsrelativetoitsdenialratefornonminorityapplicants(“denialdisparityratio”),as comparedwiththedenialdisparityratioforminorityandnonminorityapplicantsof lendersintheaggregate.TheHMDAdatadonotsuggestthatCapitalOneexcludedanyracial, ethnic,economic,orgeographicsegmentof thepopulationwithinitsbranchfootprint.62 Inasmallnumberof marketsoutsideCapitalOne’sbranchfootprint,includingCalifornia andtheChicagoMSA,thedataindicatethatCONA’spercentageof HMDAapplications fromandoriginationstominorityborrowerswaslowerthanforlendersintheaggregatein 2008and2009.63TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholdingcompaniesandtheiraffiliatesmustconduct theirmortgagelendingoperationswithoutanyabusivelendingpracticesandincompliance withallconsumerprotectionlaws. AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconcludewhether CapitalOneorFSBhasexcludedorimposedhighercostsonanygrouponaprohibited basis.TheBoardrecognizesthatHMDAdataalone,evenwiththerecentadditionof pric- 60 TheBoardreviewedHMDAdataforCONAinitscombinedassessmentareas,ineachofitsstates,initsmultistateassessmentareas(TexarkanaMSA,D.C.MetroAA,andNYMetroAA),andintwoout-of-marketareas ofinteresttothecommenters(theStateofCaliforniaandtheChicagoMSA).TheHMDAdataforCONA includeChevyChaseBank,whichCapitalOneacquiredin2009,inordertoensureconsistentresults.The BoardreviewedHMDAdataforFSBnationwide,initsassessmentarea,initsSupplementalMSAs,andin MSAsofinteresttothecommenters. 61 SomecommentersalsoquestionedCapitalOne’seffortsinawardingcontractstominority-andwomen-owned businesses.AlthoughtheBoardfullysupportsprogramsdesignedtopromoteequalopportunityandeconomic opportunitiesforallmembersofsociety,thecommentsaboutsupplierdiversitypracticesarebeyondthefactors theBoardisauthorizedtoconsiderundertheBHCAct.See,e.g.,BankofAmericaOrderatC90. Inaddition,onecommenterassertedthattheBoardshouldensurethatCapitalOne’ssupplierdiversitypracticesareconsistentwithsection342oftheDodd-FrankAct,codifiedat12U.S.C.§5452,whichinstructs theBoard,includingtheFederalReserveBanks,andcertainotherfederalagencieseachtoestablishanOffice ofMinorityandWomenInclusionthatisauthorizedtodevelopstandardsfor“assessingthediversitypolicies andpracticesofentitiesregulatedbytheagency.”TheBoardandtheotherfederalagenciesaredeveloping standardsforassessingthediversitypoliciesandpracticesofregulatedfirmsinaccordancewithsection342. Section342specificallyprovides,however,thatthosestandardsmaynotmandateanyparticulardiversitypracticeorrequireanyspecificactionbasedontheagency’sassessment.12U.S.C.§5452(b)(4). 62 TheHMDAdataalsoindicatethatalthoughFSBgenerallyreceivedalowerproportionofitsapplicationsfrom minoritiesrelativetolendersintheaggregate,FSB’sdenialdisparityratioforminorityborrowersgenerally approximatedorwasmorefavorablethanlendersintheaggregate. 63 CaliforniaandtheChicagoMSAaccountedforarelativelysmallproportionofCONA’sapplicationvolumein 2008and2009,consistentwithCapitalOne’sstrategytomakemortgageloansprimarilywithinitsbranchfootprint.In2009,CONAreceived3,329applicationsinCaliforniaand1,304applicationsintheChicagoMSA, representing4.6percentand1.8percentofitsHMDA-relatedapplicationvolume,respectively.In2010,Capital One’sHMDA-relatedapplicationvolumedroppedto110inCaliforniaand20intheChicagoMSA.
LegalDevelopments:FirstQuarter,2012 251 inginformation,provideonlylimitedinformationaboutthecoveredloans.64HMDAdata, therefore,havelimitationsthatmakethemaninadequatebasis,absentotherinformation, forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedataandtaken intoaccountotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof compliancewithfairlendingandotherconsumerprotectionlawsandregulations byCONAanditslendingaffiliates.65TheBoardalsohasconsultedwiththeOCC,theprimaryfederalsupervisorof CapitalOne’ssubsidiarybanksandFSB.Inaddition,theBoard hasconsideredinformationprovidedbyCapitalOneaboutitscompliancerisk-managementsystems. Asdiscussedfurtherbelow,CapitalOne’scomplianceprogramincludesfairlendingpolicy andproductguides,testingof theintegrityof itsHMDAdata,andfairlendingtrainingfor lending-relatedemployees.Inaddition,CapitalOnehasadoptedaprocessforevaluating newlawsandregulationsforapplicabilitytoitsmortgagelendingoperations.Moreover,the CRAexaminationsof CONAandCOBNAfoundthatbothbanksdemonstratedgood lendingactivitywithagooddispersionof loansacrossincomelevelsintheareaswithinthe banks’CRAassessmentareas.TheBoardnotesthatlendingintheareasreferencedby commentersoutsidethebanks’assessmentareaswasnotsignificant.Overall,despitethe disparitiesindicatedbytheHMDAdataforCapitalOne,theBoard’sanalysisof the HMDAdata,consultationswiththeOCC,andreviewof CapitalOne’scomplianceprogramssuggestthatCapitalOne’smortgagelendingoperationsandcomplianceprograms areadequatetoensurecompliancewithfairlendingandotherconsumerprotectionlaws. B.OtherCommenterConcerns Commentersexpressedanumberof specificconcernsregardingCapitalOne’scompliance withfairlendingandconsumerprotectionlaws.Forinstance,commentersallegedthat CapitalOne’spoliciesonoriginatinghomemortgageloansinsuredbytheFederalHousing Administration(“FHA”)havehadanillegaldiscriminatoryimpactonminorities.Specifically,commentersallegedthatCapitalOnerefusedtoloweritsminimumFICOcreditscore requiredforFHAloansfrom620to580,theminimumthresholdestablishedbyFHAfor suchloans,andthatCapitalOne’spolicyhadadiscriminatoryimpact.66Toaddressthese concerns,CapitalOneispreparingtoofferFHAloanstoborrowerswithFICOscoresof between580and620,withappropriateprotectionstominimizetheriskof theborrower’s default,bydevelopingtheservicingandreportingplatformsnecessarytosellsuchloans directlytotheGovernmentNationalMortgageAssociation. CommentersalsoallegedthatCapitalOnehadfailedtoparticipateintheDepartmentof theTreasury’sHardestHitFund(“HHF”)ProgramundertheTroubledAssetRelief ProgramandthattheallegedinactionhashadadiscriminatoryimpactonminoritiesandLMI borrowers.CommentersfurtherallegedthatCapitalOnehasnotparticipatedinother mortgagemodificationprograms,suchastheHomeAffordableMortgageProgram 64 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata. 65 ExaminersreportedthattheCONAEvaluationwasnotimpactedbyfairlendingissuesattheformerChevy ChaseBank,whichCapitalOneacquiredin2009.CapitalOneidentifiedfairlendingissuesatChevyChase BankshortlyaftertheacquisitionbutbeforeCapitalOnemergedChevyChaseBankintoCONA.Examiners reportedthatCapitalOnetookappropriateactionstoaddresstheissues. 66 OneorganizationnotedthatithadfiledacomplaintwithHUDregardingCapitalOne’spolicies.
252 FederalReserveBulletin|October2012 (“HAMP”),whichcommentersassertedalsohashadadiscriminatoryimpactonminoritiesandLMIborrowers.CapitalOneenrolledinfourstateHHFprograms,includingthose of OregonandWashington,D.C.,afterreceivingrequestsonbehalf of borrowers.Inaddition,CapitalOneparticipatesinHAMPandalsooffersaproprietarymortgagemodificationprogramsimilartoHAMP.Moreborrowersareeligibleformortgagemodifications underCapitalOne’sproprietaryprogramthanunderHAMPbecausetheproprietaryprogramhasbroadereligibilityrequirements,includingahigherbalancelimit. CommentersalsoallegedthatCapitalOne’soverdraftprotectionpracticesareunfair.CapitalOnehasadoptedpoliciesandproceduresregardingthepaymentof overdraftsconsistentwiththerequirementsof RegulationE.67Inaddition,CapitalOnehasadailylimiton overdraftfeeschargedtoanindividualcustomerandathresholdaccountbalancebelow whichoverdraftfeesarenotassessed.CapitalOnealsoprovidesconsumerfinancialeducationaboutavoidingoverdraftstoitscustomerswithrepeatoverdraftsandmakesavailablea lineof creditlinkedtothecustomers’checkingaccountstopreventoverdraftfees. SeveralcommentersexpressedconcernthatCapitalOnehasengagedinfalse,misleading, ordeceptivecreditcardpractices.CommentersreferencedpendinglitigationagainstCapitalOneallegingmisleadingmarketingpractices.68SomecommentersstatedthatCapital Onehadreceivedahighnumberof complaintsregardingitscreditcardpracticesand allegedthatCapitalOne’sstatementsaboutitscreditcardsandtheinterestratesandfees areunfairordeceptive.Inaddition,acommenterexpressedconcernthatCapitalOnehas engagedinabusivecreditcardpracticesbyofferingborrowersmultiplehigh-feecardswith lowcreditlimitsratherthanasinglecardwithahighercreditlimit. TheBoardhasconsultedwiththeOCCaboutCapitalOne’scompliancewithregulatory requirementsrelatedtoitscreditcardlendingoperationsandthesystemsCapitalOnehas adoptedtopreventfalse,misleading,ordeceptivepractices.CapitalOneconductsongoing reviewstoensurethatthetermsandmarketingof itscreditcardandotherproductsare appropriateandcomplywithapplicablelawsandregulations,includingtheTruthinLendingActandRegulationZ.CapitalOne’scomplianceprogramincludesfairlendingpolicy andproductguides,compliancefilereviews,testingof theintegrityof itsHMDAdata,and otherquality-assurancemeasurestohelpensurecompliancewithconsumerprotection laws.CapitalOnealsoprovidescomputer-basedfairlendingtrainingforlending-related employeesandsupplemental,in-persontrainingforpersonnelwithhigherfairlending compliancerisksintheirjobs.CapitalOnehasrepresentedthatitwillimplementitscompliancemanagementprogramatFSB.Inaddition,theBoardhasconsideredthecommitmentsmadebyCapitalOneandtheconditionsimposedbytheBoard,discussedabove, thataredesignedtofurtherenhancethecomplianceprogramsatCapitalOne.Finally, CapitalOnedoesnotissue“highfee”cardsasdefinedbytheCreditCardAccountability ResponsibilityandDisclosureActof 2009.CapitalOnealsohaspoliciesthatlimitanindividualcustomertoamaximumof twounsecured,general-purposecreditcards. 67 12CFRpart205. 68 OnJanuary7,2012,CapitalOneenteredintoasettlementagreementwiththeWestVirginiaAttorneyGeneral toresolvealawsuitallegingthatCapitalOneviolatedtheWestVirginiaConsumerCreditandProtectionAct between2001and2005by,amongotherthings,offeringapaymentprotectionproducttocustomerswhowere ineligibleforcertainbenefitsatthetimeofenrollmentandencouragingcustomerstoenterintodebtrepayment plansthroughsolicitationsthatpurportedtobeoffersofnewcredit.Aspartofthesettlement,underwhich CapitalOnedidnotadmitguilt,CapitalOneagreedtoprovide$13.5millionfordebtforgiveness,debtrelief, andconsumereducationforWestVirginiaconsumers.CapitalOnehasenhanceditscomplianceriskmanagementpracticessincetheperiodtowhichthecomplaintrelatesanddiscontinuedoneofthelinesofbusiness thatwasthefocusofthelawsuit.
LegalDevelopments:FirstQuarter,2012 253 FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct.69A financialstabilityfactoralsowasaddedbytheDodd-FrankActtothelistof considerationsinreviewingproposalsundersection3of theBHCAct.70 FinancialStabilityStandard Inreviewingapplicationsandnoticesundersections3and4of theBHCAct,theBoard expectsthatitwillgenerallyfindasignificantadverseeffectif thefailureof theresulting firm,oritsinabilitytoconductregular-course-of-businesstransactions,wouldlikelyimpair financialintermediationorfinancialmarketfunctioningsoastoinflictmaterialdamageon thebroadereconomy.Thiskindof damagecouldoccurinanumberof ways,including seriouslycompromisingtheabilityof otherfinancialinstitutionstoconductregularcourse-of-businesstransactionsorseriouslydisruptingtheprovisionof creditorother financialservices. Toassessthelikelihoodthatfailureof theresultingfirmmayinflictmaterialdamageonthe broadereconomy,theBoardwillconsideravarietyof metrics.Thesewouldincludemeasuresof thesizeof theresultingfirm;availabilityof substituteprovidersforanycritical productsandservicesofferedbytheresultingfirm;interconnectednessof theresultingfirm withthebankingorfinancialsystem;extenttowhichtheresultingfirmcontributestothe complexityof thefinancialsystem;andextentof thecross-borderactivitiesof theresulting firm.71Thesecategoriesarenotexhaustive,andadditionalcategoriescouldinformthe Board’sdecision.72Thesemetricsareusefulinevaluatingtheextenttowhichaninstitution’screditors,counterparties,investors,orothermarketparticipantsmayhavefinancial exposuretotheinstitutionandthusmayexperiencestrainwhenthefirmdoesnotmeetits financialobligationstothem;theextenttowhichtheinstitutionholdsassetsthat,if liquidatedquickly,wouldsignificantlydisrupttradingorfundinginkeymarketsorcausesignificantlossesorfundingproblemsforotherfirmswithsimilarholdingsduetofallingasset prices;theextenttowhichfinancialdistressintheresultinginstitutionmaycauseother institutionsthatholdsimilarassetsorareengagedinsimilaractivitiesorareperceivedto 69 Dodd-FrankAct,§604(e),codifiedat12U.S.C.§1843(j)(2)(A).OtherprovisionsoftheDodd-FrankAct imposeasimilarrequirementthattheBoardconsiderorweightheriskstofinancialstabilityposedbyamerger, acquisition,orexpansionproposalbyafinancialinstitutionSeesections163,173,and604(d)and(f)ofthe Dodd-FrankAct.AspecialprocesswasestablishedbytheDodd-FrankActforrequiringthedivestitureofa businessbyafinancialfirm.Section121oftheDodd-FrankActprovidesthattheBoardshallrequireafinancialfirmtodivestorterminateabusinessiftheBoarddeterminesthatthecompany“posesagravethreattothe financialstabilityoftheUnitedStates;”theFinancialStabilityOversightCouncil(“FSOC”),byavoteoftwothirdsofitsmembers,approvestheaction;andtheBoardhasdeterminedthatactionsotherthandivestitureor terminationofthebusinessareinadequatetomitigatethegravethreat.12U.S.C.§5331. 70 Dodd-FrankAct,§604(d),codifiedat12U.S.C.§1842(c)(7). 71 Alargevalueofametricforanyonecategorymaysuggestthatdistressattheresultingfirmislikelytoresultin materialdamagetothebroadereconomy.ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financialsystem(“USFS”).Forexample,proformaassetsizeoftheresultingfirmisexpressedintermsoftheresultingfirm’sproformaassetsasashareoftotalassetsoftheUSFS.For thispurpose,theUSFScomprisesallU.S.financialinstitutions(“USFIs”)usedincomputingtotalliabilitiesfor thepurposesofcalculatingthelimitationonliabilitiesofafinancialcompanyrequiredundersection622ofthe Dodd-FrankActandincludesU.S.-basedbankandnonbankaffiliatesofforeignbankingorganizations.In connectionwithitssupervisionofnonbankfinancialinstitutionsthattheFSOCdeterminescouldposeathreat tothefinancialstabilityoftheUnitedStates,theBoardmayrequirefinancialandotherreportingbythese institutions,whichwouldincreasethepoolofavailabledataforfinancialstabilityanalyses.Seesections113and 151oftheDodd-FrankAct,codifiedat12U.S.C.§§5323and5341,respectively. 72 Themetricsfortheresultingentityarenot,bythemselves,determinative.TheBoardwilltakeintoaccountall factorsthatarerelevanttoatransaction,someofwhichmaynotbecapturedbythemetrics.
254 FederalReserveBulletin|October2012 bedependentinimportantwaysuponthedistressedinstitutiontoexperiencealossof marketconfidence;andtheextenttowhichaninstitutioninfinancialdistressmaynolongerbe abletoprovideaservicethatmarketparticipantsrelyuponandforwhichtherearelimited readilyavailablesubstitutes. Inadditiontothesequantitativemeasures,theBoardwillconsiderqualitativefactors,such astheopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy. TheBoard’smethodologyiscompatiblewiththeBaselCommittee’sapproachtoidentifyingglobalsystemicallyimportantbanks(“GSIBs”)73butdiffersfromtheBaselCommittee’sapproachinthreeimportantways.First,theBoardwillconsiderabroaderandsomewhatdifferentsetof metrics.Second,theBoardwillconsiderthesystemicfootprintof the resultingfirmrelativetotheUSFS.Third,undertheBoard’sapproach,itispossiblethatif evenasinglecategoryof metricsindicatesthataresultingfirmwouldposeasignificant risktothestabilityof theU.S.bankingorfinancialsystem,theBoardmaydeterminethat thereisanadverseeffectof theproposalonthestabilityof theU.S.bankingorfinancial system.74Thismethodologywillhelpidentifynotonlythemoreobviousrisksassociated withsignificantexpansionproposalsbyGSIBs,butalsotransactionsinvolvingotherfirms thatcouldposearisktothestabilityof theU.S.bankingorfinancialsystem,evenif the resultingfirmisnotaGSIB. Ontheotherhand,certaintypesof transactionslikelywouldhaveonlyademinimis impactonaninstitution’ssystemicfootprintand,therefore,arenotlikelytoraiseconcerns aboutfinancialstability.Forexample,aproposalthatinvolvesanacquisitionof lessthan $2billioninassets,resultsinafirmwithlessthan$25billionintotalassets,orrepresentsa corporatereorganizationmaybepresumednottoraisefinancialstabilityconcernsabsent evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness, complexity,cross-borderactivities,orotherriskfactor. Analysisof theFinancialStabilityImpactof thisProposal Inthiscase,theBoardhasundertakenitsmetrics-basedanalysistodeterminewhetherthis proposalpresentsasignificantrisktothestabilityof theU.S.bankingorfinancialsystem. TheBoardalsohasconsideredtherelativedegreeof difficultyof resolvingtheresulting firm.TheBoardreviewedpubliclyavailabledata,commentsreceivedfromthepublic,data compiledthroughthesupervisoryprocess,anddataobtainedthroughinformationrequests totheinstitutionsinvolvedintheproposal,aswellasqualitativeinformation. Size.Anorganization’ssizeisoneimportantindicatorof theriskthattheorganization posestothefinancialsystem.Congresshasimposedaspecific10percentnationwide depositlimitanda10percentnationwideliabilitieslimitonpotentialcombinationsby bankingorganizations.75Otherprovisionsof theDoddFrankActimposespecialor 73 SeeBaselCommitteeonBankingSupervision(“BaselCommittee”).“Globalsystemicallyimportantbanks: assessmentmethodologyandtheadditionallossabsorbencyrequirement.Rulestext.”November2011. 74 TheBoardwillconsidereachmetricbothindividuallyandincombinationwithothers,ratherthanfollowing theBaselCommitteeapproachoffocusingsolelyonaweightedaverageofallthemetrics.Forexample,a mergeroftwofirmsthataredominantprovidersofcriticalproductsorserviceswouldlikelypresentasignificantrisktoU.S.financialstability,evenifthevaluesoftheresultingfirm’smetricswerelowinallother categories. 75 12U.S.C.§§1843(i)(8)and1852.
LegalDevelopments:FirstQuarter,2012 255 enhancedsupervisoryrequirementsonlargebankingorganizations.76Thesemeasuresare helpfulindicatorsof potentialsystemicrisk;however,thefactthatCongressalsorequires theBoardtoreviewthepotentialsystemicimpactof atransactionthatdoesnotreachthese limitslikelyindicatestheywerenotmeanttosubstituteforananalysisof sizeaspartof the systemicriskfactor. TheBoardhasconsideredmeasuresof CapitalOne’ssizerelativetotheUSFS,including CapitalOne’sconsolidatedassets,itsconsolidatedliabilities,77itstotalleverageexposures,78 anditsU.S.deposits.Asaresultof theproposedacquisitionof FSBandtheHSBC assets,79CapitalOnewouldbecomebetweenthe14thand20thlargestUSFIbasedon assets,liabilities,andleverageexposureswithbetween1.1percentand1.6percentof the USFStotal.Basedondeposits,CapitalOnewouldbecomethefifthlargestUSFI,with 2.3percentof thetotal.Thesemeasuressuggestthat,althoughthecombinedorganization wouldbelargeonanabsolutebasis,itssharesof USFSassets,liabilities,leverageexposures,anddepositswouldremainmodest,anditssharesof nationaldepositsandliabilities wouldfallwellbelowthe10percentlimitationssetbyCongress. Measuresof afinancialinstitution’ssizeonaproformabasiscouldeitherunderstateor overstateriskstofinancialstabilityposedbythefinancialinstitution.Forinstance,arelativelysmallinstitutionthatoperatesinacriticalmarketforwhichthereisnosubstituteprovider,orthatcouldtransmititsfinancialdistresstootherfinancialorganizationsthrough multiplechannels,couldpresentsignificantriskstothestabilityof theUSFS. AlthoughtheproposedtransactionwouldincreaseCapitalOne’soverallsize,andresultin itbecomingthefifthlargestbankintheUnitedStatesbasedonU.S.deposits,itslargersize mustbeviewedinconjunctionwiththeothermetrics.Accordingly,theBoardhasconsideredotherfactors,bothindividuallyandincombinationwithsize,toevaluatethelikely impactof thistransactiononfinancialstability. Substitutability.TheBoardhasexaminedwhetherCapitalOneorFSBengagesinany activitiesthatarecriticaltothefunctioningof theUSFSandwhethertherewouldbe adequatesubstituteprovidersthatcouldquicklystepintoperformsuchactivitiesshould thecombinedentitysuddenlybeunabletodosoasaresultof severefinancialdistress. CapitalOneacceptsretaildepositsandengagesinmortgagelending,mortgageandcredit cardservicing,commercialrealestatefinancing,smallbusinesslending,creditcardand otherconsumerlending,andsecuritiesbrokerageservices.FSBofferssavingsaccounts,certificatesof deposit,residentialmortgageloans,andretailsecuritiesbrokerageservices.In mostof theseactivities,CapitalOnehas,andasaresultof theproposals,wouldcontinue 76 Section165oftheDodd-FrankAct,codifiedat12U.S.C.§5365,requirestheBoardtosubjectallbankholdingcompanieswithtotalconsolidatedassetsof$50billionormore,andanynonbankfinancialcompanydesignatedbytheFSOCforsupervisionbytheBoard,toenhancedprudentialstandardsinordertopreventormitigateriskstothefinancialstabilityoftheUnitedStatesthatcouldarisefromtheseveredistressorfailureof thesefirms.TwocommentersurgedtheBoardnottoapprovetheproposedtransactionuntiltheBoardadopts rulestoimplementsection165oftheDodd-FrankAct.TheBoard,jointlywiththeFDIC,hasissuedanotice offinalrulemakingthatimplementstherequirementsofsection165(d).See76FederalRegister67,323 (November1,2011).TheBoardalsohasissuedanoticeofproposedrulemaking,implementingtheother requirementswithinsection165oftheDodd-FrankAct.77FederalRegister594(January5,2012). 77 TheBoardhasconsideredbothconsolidatedliabilitiesonCapitalOne’sbalancesheetandliabilitiesascomputedunderthelimitationsonconsolidatedliabilitiesinsection622oftheDodd-FrankAct,codifiedat 12U.S.C.§1852. 78 Totalleverageexposureiscalculatedinamannerroughlyequivalenttothemethodologysetoutin“BaselIII:A globalregulatoryframeworkformoreresilientbanksandbankingsystems”andtakesintoaccountbothonandoff-balance-sheetassets. 79 Asnotedabove,CapitalOnehasappliedtotheOCCforapprovalundertheBankMergerActtoacquireupto $29billionincreditcardassetsfromHSBC.TheBoardhasassumedtheacquisitionoftheentire$29billionin assets.
256 FederalReserveBulletin|October2012 tohaveasmallshareonanationwidebasis,andnumerouscompetitorswouldremainfor eachof theactivitiesinwhichCapitalOneandFSBengage. CapitalOneiscurrentlythefifthlargestproviderof creditcardsintheUnitedStates. Assumingtheacquisitionof theHSBCcreditcardassets(atransactionsubjecttoreview bytheOCCinaseparateproceeding),CapitalOnewouldincreaseitsshareof outstanding creditcardbalancesintheUnitedStatesfrom7.7percentto11.8percentandthereby becomethefourthlargestproviderof creditcardsintheUnitedStates.Inconsideringthe potentialeffectonfinancialstabilityinthiscase,theBoardalsohasconsideredthatthree competingcreditcardlenderswouldeachhaveoutstandingcreditcardbalancesthatare betweenone-thirdandtwo-thirdslargerthanthoseof CapitalOne,andtwootherlenders wouldeachhavebalancesapproximatelyhalf thesizeof theoutstandingcreditcardbalancesof CapitalOne.Inaddition,therearenumerousothercreditcardlendersthatoperate onanationalorregionalbasis.CapitalOne’sshareof creditcardloansdoesnotappearto besubstantialenoughtocausesignificantdisruptionsinthesupplyof creditcardloansif CapitalOneweretoexperiencedistress,duetotheavailabilityof substituteprovidersthat couldassumeCapitalOne’sbusiness. Interconnectedness.TheBoardhasexamineddatatodeterminewhetherfinancialdistress experiencedbythecombinedentitycouldcreatefinancialinstabilitybybeingtransmitted toanyotherinstitutionsormarketswithintheU.S.bankingorfinancialsystem.80 CapitalOnedoesnotengagecurrentlyandasaresultof thistransactionwouldnotengage inbusinessactivitiesorparticipateinmarketstoadegreethatwouldposesignificantrisk tootherinstitutions,intheeventof financialdistressof thecombinedentity.Thecombinedentity’suseof wholesalefunding,asashareof USFSwholesalefundingusage,isless than1percentandiswellbelowitscorrespondingshareof USFSconsolidatedassets.The combinedentity’ssharesof USFSintra-financialsystemassetsandliabilitiesalsoareless than1percent.Thetransactionunderreviewinthiscasealsowouldnotincreaseexposure toanysinglecounterpartythatisamongthetopthreecounterpartiesof eitherCapitalOne orFSBbeforethemerger. Complexity.TheBoardhasconsideredtheextenttowhichthecombinedentitywouldcontributetotheoverallcomplexityof theUSFS.Thecombinedentity’scomplexassetsand tradingbookandavailable-for-salesecuritiesrepresentasignificantlylowershareinthe USFSthanitscorrespondingshareof consolidatedassets.TheBoardalsohasconsidered whetherthecomplexityof thecombinedentity’sassetsandliabilitieswouldhinderits timelyandefficientresolutionintheeventitweretoexperiencefinancialdistress.Capital 80 CommentersarguedthatCapitalOneismateriallyinterconnectedwiththeUSFSbecauseitsecuritizesaportionofitscreditcardreceivablesintosecuritiesthataresoldtopensionfunds,insurancecompanies,andother large,systemicallyimportantinstitutions.Thisfactorismitigatedinseveralways.CapitalOne’screditcard securitizationsrepresentarelativelysmallportionofthecreditcardsecuritizationmarket.Takingintoaccount theacquisitionofHSBC’screditcardbusiness,CapitalOne’stotalshareofcreditcardsecuritizationsisless than9percent,consistentwithitsshareofoutstandingcreditcardloans.AnumberoffactorsalignCapital One’sinterestinensuringsoundunderwritingoftheunderlyingcreditcardaccountswiththoseofinvestorsin thesecuritization.Theseincluderecentchangestoaccountingrulesthatrequirecreditcardsecuritizationstobe consolidatedonthebalancesheetofthesecuritizerinmanysituationsandcapitalrulesthatrequireacapital reserve.SeeStatementsofFinancialAccountingStandardsNos.166and167,codifiedinAccountingStandardsCodificationTopics860and810;FinalRuleforRegulatoryCapitalStandardsRelatedtoStatementsof FinancialAccountingStandardsNos.166and167,75FederalRegister4636(January28,2010).Inaddition, CapitalOneretainsaseller’sinterestthatexposestheinstitutiontolossesfromtheunderlyingcreditcard receivablesonaparipassubasiswithinvestorsinitscreditcardsecuritizations.TheDodd-FrankActalso enhancedthedisclosureandreportingobligationsofsecuritizerstoprovidebetterinformationtoinvestorsto analyzethecreditrisksandongoingperformanceofthesecuritizedassetsand,ultimately,whethertopurchase orselltheasset-backedsecurities.See§§942,943,and945oftheDodd-FrankAct,ascodifiedby15U.S.C. §§78o-7,77d,and77g,respectively.
LegalDevelopments:FirstQuarter,2012 257 OneandFSBdonotengageincomplexactivities,suchasbeingacoreclearingandsettlementorganizationforcriticalfinancialmarkets,thatmightcomplicatetheresolutionprocessbyincreasingthecomplexity,costs,ortimeframesinvolvedinaresolution.Underthe circumstances,resolvingthecombinedorganizationwouldnotappeartoinvolvealevelof cost,time,ordifficultysuchthatitwouldcauseasignificantincreaseinrisktothestability of theUSFS.81 Cross-BorderActivity.TheBoardhasexaminedthecross-borderactivitiesof CapitalOne andFSBtodeterminewhetherthecross-borderpresenceof thecombinedorganization wouldcreatedifficultiesincoordinatinganyresolution,therebysignificantlyincreasingthe risktoU.S.financialstability.CapitalOnehascreditcardoperationsintheUnitedKingdomandCanadathattotalapproximately$8.7billion.Thesebusinessesaresimilarto CapitalOne’soperationsintheUnitedStatesanddonotaddanysubstantialcomplexityto itsoperations.AlthoughFSBcurrentlyisownedbyINGGroep,aDutchfinancialinstitution,FSBoperatesonlyintheUnitedStates.Thecombinedorganizationisnotexpectedto engageinanyadditionalactivitiesoutsidetheUnitedStatesasaresultof theproposed transaction.Inaddition,thecombinedorganizationwouldnotengageintheprovisionof criticalserviceswhosedisruptionwouldimpactthemacroeconomicconditionof the UnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. FinancialStabilityFactorsinCombination.TheBoardhasassessedtheforegoingfactors individuallyandincombinationtodeterminewhetherinteractionsamongthemmightmitigateorexacerbateriskssuggestedbylookingatthemindividually.TheBoardalsohasconsideredwhethertheproposedtransactionwouldprovideanystabilitybenefitsandwhether enhancedprudentialstandardsapplicabletothecombinedorganizationwouldoffsetany potentialrisks.82 Forinstance,concernsregardingCapitalOne’ssizewouldbegreaterif CapitalOnewere alsohighlyinterconnectedtomanydifferentsegmentsof theUSFSthroughitscounterpartyrelationshipsorotherchannels,orif CapitalOneparticipatedtoalargerextentthan itdoesinshort-termfundingandcapitalmarkets.TheBoard’slevelof concernalsowould begreaterif thestructureandactivitiesof CapitalOneweresufficientlycomplexthat,if CapitalOneweretofail,itwouldbedifficulttoresolvequicklywithoutcausingsignificant disruptionstootherfinancialinstitutionsormarkets. Asdiscussedabove,thecombinedentitywouldnotbehighlyinterconnected.Furthermore, theorganizationalstructureandoperationsof thecombinedorganizationwouldbecenteredonacommercialbankingbusiness,andintheeventof distress,theresolutionprocess wouldbehandledinapredictablemannerbyrelevantauthorities.TheBoardalsohasconsideredothermeasuresthataresuggestiveof thedegreeof difficultywithwhichCapital Onecouldberesolvedintheeventof afailure,suchastheorganizationalandlegalcomplexityandcross-borderactivitiesof theresultingfirm.ThesemeasuressuggestthatCapitalOnewouldbesignificantlylesscomplicatedtoresolvethanthelargestU.S.universal banksandinvestmentbanks. Basedontheseandalltheotherfactsof record,theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. 81 Asnotedpreviously,theDodd-FrankActrequiresbankholdingcompaniesthatholdmorethan$50billionin totalconsolidatedassets,suchasCapitalOne,tosubmitresolutionplans,whichareintendedtoassisttheinstitutionsinmanagingtheirrisksandtoplanforarapidandorderlyresolutionintheeventofmaterialdistressor failureandtoenabletheregulatorstounderstandaninstitution’scomplexity.See12U.S.C.§5365. 82 Section165oftheDodd-FrankAct,codifiedat12U.S.C.§5365.
258 FederalReserveBulletin|October2012 PublicBenefitsof theProposal Asnotedabove,theBoardisrequiredtoconsiderwhethertheproposedacquisitionof FSB anditsnonbankingsubsidiaries“canreasonablybeexpectedtoproducebenefitstothe public,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedor unfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestability of theUnitedStatesbankingorfinancialsystem.”83 Aspartof thisreview,theBoardconsideredthattheEuropeanCommissionrequiredING GroeptodivestFSBby2013asaconditionof itsapprovaltoallowthegovernmentof The NetherlandstoprovideaidtoINGGroepin2008and2009.Thesaleof FSBtoCapital OneprovidesdepositorcontinuitytotheU.S.operationsof FSBandtoFSBcustomersandenablesallFSBcustomerstocontinuereceivingtheirbankingservicesbyvirtueof itsacquisitionbyasingleorganization. Therecordindicatesthatconsummationof theproposalwouldresultinadditionalbenefits toconsumerscurrentlyservedbyFSB.TheproposalwouldallowCapitalOnetooffera widerarrayof mortgageloansandbankingproductsandservicestoFSB’scustomers, includingfixed-rate30-yearmortgageloans,full-accesscheckingaccounts,automobile loans,smallbusinessloans,commercialloans,andcreditcardandotherconsumerloans, noneof whichareprovidedbyFSB.Inaddition,FSBcustomerswouldhaveaccessto CapitalOne’sbranchlocationsandATMnetwork,smallbusinesstechnicalassistanceprograms,andcorporatetrustservices.84 Asnotedabove,CapitalOneplanstoadddeposit-takingfacilitiestoFSB’seightcafés, whichwillenhancetheservicesavailabletothecustomersandcommunitiesservedbythese cafés.Theconversionof theselocationstobranchesof FSBwouldalsoexpandCapital One’sCRAassessmentareastotherelevantcommunitiesservedbythosecafés.Sevenof theeightcafésareinareasthatarenotcurrentlyservedbybranchesof FSB;fourof these cafésareinLMIcensustracts. Inaddition,CapitalOne’scustomerswouldbenefitfromaccesstoamoreefficientand robustInternetbankingservicethaniscurrentlyofferedbyCapitalOne.Thisprovides CapitalOnecustomersabroadersuiteof productsandservicesandmoreconvenientways toaccesstheiraccountsthancurrentlyavailable. Theproposedacquisitionof FSBwouldalsoincreaseCapitalOne’saccesstolow-cost deposits,whichwilldiversifyCapitalOne’sfundingbase.Theproposalalsowouldresultin significantoperationalefficienciesforCapitalOne.CapitalOnewouldrealizesignificant costsavingsfromconsolidatingsystems,platforms,andcorporatestaff functions.Inaddition,CapitalOnewouldachievesubstantialfundingsavingsfromoptimizingmanagement of thecombineddepositportfolio.Byimprovingefficienciesandstrengtheningitsfunding andliquidityprofile,CapitalOnewouldbebetterplacedtoprovidecreditandotherbankingservicestoitsentirecustomerbase,includingcurrentcustomersof FSB. TheBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithin theframeworkof RegulationYandBoardprecedentisnotlikelytoresultinsignificant adverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition, 83 12U.S.C.§1843(j)(2)(A). 84 SomecommentersadvocatedthatCapitalOnecontinuetoofferthesametermsandconditionsapplicableto FSB’ssavingsaccounts.CapitalOnehasrepresentedthatitdoesnotplantochangeanyofFSB’scurrentproductfeatures.
LegalDevelopments:FirstQuarter,2012 259 conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnited Statesbankingorfinancialsystem.Moreover,forthereasonsdiscussedabove,theBoard believesthatthefactorsrelatedtocompetition,financialandmanagerialresources,convenienceandneeds,andfinancialstabilityareconsistentwithapprovalof thiscase. Basedonallthefactsof record,includingthecommitmentsandconditionsnotedinthis case,theBoardhasconcludedthatconsummationof theproposalcanreasonablybe expectedtoproducepublicbenefitsthatwouldoutweighanylikelyadverseeffects.Accordingly,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunderthestandard of section4(j)(2)of theBHCActisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.85Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyCapitalOne andFSBwiththeconditionsimposedinthisorderandthecommitmentsmadetothe Boardinconnectionwiththenotice.TheBoard’sapprovalalsoissubjecttoalltheconditionssetforthinRegulationY,includingthoseinsections225.7and225.25(c),86andtothe Board’sauthoritytorequiresuchmodificationorterminationof theactivitiesof abank holdingcompanyoranyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andtopreventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandordersissuedthereunder.Forpurposesof thisaction,theseconditionsand commitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnection withitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunder applicablelaw. Theacquisitionshallnotbeconsummatedlaterthanthreemonthsaftertheeffectivedate of thisorder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederal ReserveBankof Richmond,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary14,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 85 SeveralcommentersrequestedthattheBoardholdapublichearingontheproposal.TheBoard’sregulations provideforahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissuesofmaterial factthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoardalsomay,in itsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsidered thecommenters’requestsinlightofallthefactsofrecord.IntheBoard’sview,thecommentershavehad ampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthatthe Boardhasconsideredinactingontheproposal.Thecommenters’requestsfailtoidentifydisputedissuesof factthatarematerialtotheBoard’sdecisionandwouldbeclarifiedbyapublichearing.Inaddition,the requestsfailtodemonstratewhythewrittencommentsdonotpresentthecommenters’viewsadequatelyor whyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsof record,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly, therequestsforapublichearingontheproposalaredenied. 86 12CFR225.7and225.25(c).
260 FederalReserveBulletin|October2012 Hana Financial Group Inc. Seoul, Korea OrderApprovingNoticetoEngageinNonbankingActivities FRBOrderNo.2012-1(February8,2012) HanaFinancialGroupInc.,Seoul,Korea(“HFG”),aforeignbankingorganizationsubject totheprovisionsof theBankHoldingCompanyAct(“BHCAct”),1hasrequestedthe Board’sapprovalundersection4(c)(8)of theBHCAct2andsection225.24of theBoard’s RegulationY3toacquireindirectcontrollinginterestsinKEBNYFinancialCorp.,New York,NewYork(“KEBNY”),andKEBLAFinancialCorp.,LosAngeles,California (“KEBLA”).HFGwouldacquireKEBNYandKEBLAaspartof theacquisitionof a controllinginterestinKoreaExchangeBank,Seoul,Korea(“KEB”).KEBNYandKEB LAarewhollyownedsubsidiariesof KEB.4Asaresultof theproposedacquisition,HFG wouldengageintheUnitedStatesinthefollowingnonbankingactivities: 1. making,acquiring,brokering,orservicingloansorotherextensionsof credit(includingfactoring,issuinglettersof credit,andacceptingdrafts)fortheaccountof KEB NYandKEBLA,orfortheaccountof others,inaccordancewith12CFR 225.28(b)(l);and 2. activitiesusualinconnectionwithmaking,acquiring,brokering,orservicingloansor otherextensionsof credit,asdeterminedbytheBoardandpermittedunder12CFR 225.28(b)(2). Noticeof theproposal,affordinginterestedpersonsanopportunitytocomment,hasbeen publishedintheFederalRegister(76FederalRegister6136(2011)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredthenoticeandallcommentsreceivedin lightof thefactorssetforthinsection4of theBHCAct. HFG,withconsolidatedassetsof approximately$157.1billion,isthefourthlargestbankingorganizationinKorea.IntheUnitedStates,HFG,indirectlythroughitssubsidiary HanaBank,Seoul,operatesaNewYorkstate-licensedagencyinNewYorkCity.KEBisa KoreancommercialbankheadquarteredinSeoulwithtotalassetsof approximately $92billion.KEBisthefifthlargestcommercialbankinKorea,anditprovidesabroad rangeof bankingandotherfinancialservicesthroughouttheworld.IntheUnitedStates, KEBownsandoperatesthreewhollyownedsubsidiaries.Twoof thesubsidiaries,KEB NYandKEBLA,arelendingsubsidiariesthathold,service,andoriginatecommercial loansandprovidetradefinancing.Thethirdsubsidiaryengagesinservicingactivities.5 TheBoardhasdeterminedbyregulationthatextendingcreditandservicingloans,and activitiesrelatedtoextendingcredit,areactivitiescloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.HFGhascommittedtoconducttheproposedactivitiesin accordancewiththelimitationssetforthinRegulationYandtheBoard’sorders. 1 AstheparentcompanyofaforeignbankoperatinganagencyintheUnitedStates,HFGissubjecttotheBHC Actbyoperationofsection8(a)oftheInternationalBankingActof1978(12U.S.C.§3106(a)). 2 12U.S.C.§§1843(c)(8)and1843(j). 3 12CFR225.24. 4 AcommenterassertedthatGoldmanSachsand“others”shouldjointhisapplication.GoldmanSachsowns lessthan5percentofthesharesofHFGanddoesnotrequireBoardapprovalundertheBHCActwithrespect totheproposedtransaction.NoothershareholderofHFGissubjecttotheBHCActandnonerequires approvalundertheact. 5 KEBUSAInternationalCorp.engagesinservicingactivitiesthatarepermittedundersection4(c)(1)(C)ofthe BHCAct(12U.S.C.§1843(c)(1)(C)).
LegalDevelopments:FirstQuarter,2012 261 Inreviewingtheproposal,theBoardisrequiredbysection4(j)(2)(A)of theBHCActto determinethattheproposedacquisition“canreasonablybeexpectedtoproducebenefitsto thepublic...thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”6Aspartof itsevaluationof thesefactors,theBoardconsidersthefinancialandmanagerialresources of thecompaniesinvolvedandtheeffectof theproposalonthoseresources.7 Inassessingthefinancialandmanagerialresourcesof thecompaniesinvolved,theBoard hasconsidered,amongotherthings,informationprovidedbyHFG,publiccomment,confidentialreportsof examination,otherconfidentialsupervisoryinformation,andpublicly reportedfinancialandotherinformation.Inevaluatingthefinancialfactorsof thisproposal,theBoardhasconsideredanumberof factors,includingcapitaladequacy.HFGhas capitalratiosinexcessof theminimumlevelsthatwouldberequiredbytheBaselCapital Accordandareconsideredequivalenttothecapitalthatwouldberequiredof aU.S.bankingorganization.ThetransactionintheUnitedStatesisasmallpartof theacquisitionby HFGof aforeignbankinKorea.TheBoardhasconsideredthattheprimarysupervisor forHFGinKoreahasreviewedthefinancialfactorsandapprovedtheacquisitionof KEB byHFG. Inaddition,theBoardhasconsideredthemanagerialresourcesof HFG,8thesupervisory experiencesof therelevantbankingsupervisoryagencieswithHFG,andHFG’srecordof compliancewithapplicableU.S.bankinglaws.9TheBoardhasalsoconsultedwithhome countryauthoritiesresponsibleforsupervisingHFGandreviewedreportsof examination fromtheappropriatefederalandstatesupervisorsof theU.S.operationsof HFGthat assesseditsmanagerialresources.Asnoted,HFG’shomecountrysupervisor,theKorean FinancialServicesCommission,hasapprovedtheproposedacquisition.Basedonallthe factsof record,theBoardhasconcludedthatconsiderationsrelatingtothefinancialand managerialresourcesof theorganizationsinvolvedareconsistentwithapproval. Section4(j)(2)(A)of theBHCActalsorequirestheBoardtoconsiderwhethertheproposal islikelytoposeasignificantrisktothestabilityof theUnitedStatesbankingorfinancial system.TherewouldbeonlyminimallinkagesbetweenHFGandtheU.S.financialsystem if theproposalwereapproved.Forinstance,KEBNYandKEBLAhavecombinedtotal U.S.assetsof $626million,andHFG’scurrentU.S.assets,representedbyHanaBank’s agencyinNewYork,areapproximately$600million.TheBoardbelievesthattheproposal wouldnotposeasignificantrisktotheUnitedStatesbankingorfinancialsystem. TheBoardhasalsoconsideredcarefullythecompetitiveeffectsof theproposalinlightof allthefactsof record.HFGandKEBcompeteonlyintheMetropolitanNewYork-New Jerseylendingmarketandrepresentarelativelysmallaggregatepositionwithinthat market.TheMetropolitanNewYork-NewJerseylendingmarketisunconcentrated,and numerouscompetitorswouldremaininthemarket.Basedonallthefactsof record,the 6 12U.S.C.§1843(j)(2)(A). 7 12CFR225.26. 8 AcommenterexpressedconcernaboutHFG’smanagerialstrengthbasedonanarticleinaKoreannewspaper thatdescribedasupervisory“caution”issuedagainstHanaBankforviolationofcertaininsurancerequirementsinKorea.Inconnectionwiththisnotice,theBoardhasreviewedHFG’srecordofoperationintheU.S. andhasconsultedwithHFG’shomecountrysupervisor. 9 ThecommenterrequestedthattheBoardconsidertheproposalinlightoftheCommunityReinvestmentAct (“CRA”)(12U.S.C.§2901etseq.).TheCRAdoesnotprovideforconsiderationofanotificant’sCRAperformancerecordintheevaluationofanoticetoacquireanondepositoryinstitutionundersection4oftheBHC Act.ThecommenteralsoaskedthattheBoard“explore”a2003judicialdecision.However,thatdecisiondoes notinvolveanyentityaffiliatedwitheitherofthepartiestotheproposedtransaction.
262 FederalReserveBulletin|October2012 BoardconcludesthatHFG’sproposedactivitieswouldhaveademinimiseffectoncompetitionfortherelevantnonbankingactivities. TheBoardexpectsthattheproposedactivitieswouldresultinbenefitstothepublicby enhancingtheabilityof HFGandKEBtoservetheircustomerswithintheUnitedStates. TheBoardconcludesthattheconductof theproposednonbankingactivitieswithinthe frameworkof RegulationYandBoardprecedentisnotlikelytoresultinadverseeffects, suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orasignificantrisktothestabilityof theUnited Statesbankingorfinancialsystemthatwouldoutweighthepublicbenefitsof theproposal discussedabove.Accordingly,basedonallthefactsof record,theBoardhasdetermined thatthebalanceof thepublicbenefitsfactorthatitmustconsiderundersection4(j)of the BHCActisconsistentwithapprovalof theproposal. Basedontheforegoing,theBoardhasdeterminedthatthenoticeshouldbe,andherebyis, approved.10Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordin lightof thefactorsthatitisrequiredtoconsiderundertheBHCAct.TheBoard’sapproval isspecificallyconditionedoncompliancebyHFGwiththeconditionsimposedinthis orderandthecommitmentsmadetotheBoardinconnectionwiththenotice.TheBoard’s approvalisalsosubjecttoalltheconditionssetforthinRegulationY,includingthosein sections225.7and225.25(c),11andtotheBoard’sauthoritytorequiresuchmodificationor terminationof theactivitiesof HFGandanyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andtopreventevasionof,theprovisionsof theBHCAct andtheBoard’sregulationsandordersissuedthereunder.Forpurposesof theseactions, theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbythe Boardinconnectionwithitsfindingsanddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Thistransactionshallnotbeconsummatedlaterthanthreemonthsaftertheeffectivedate of thisorderunlesssuchperiodisextendedforgoodcausebytheBoardortheFederal ReserveBankof NewYork,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary8,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard 10 ThecommenterhasrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section4of theBHCActandtheBoard’srulesthereunderprovideforahearingonanoticetoacquirenonbankingcompaniesiftherearedisputedissuesofmaterialfactthatcannotberesolvedinsomeothermanner.12CFR 225.25(a)(2).Underitsrules,theBoardalsomay,initsdiscretion,holdapublicmeetingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredcarefullythecommenter’srequestinlightofallthefactsof record.IntheBoard’sview,thecommenterhadampleopportunitytosubmititsviews,and,infact,submitted writtencommentsthattheBoardhasconsideredcarefullyinactingontheproposal.Thecommenter’srequest failstodemonstratewhythewrittencommentsdonotpresentitsviewsadequatelyandfailstoidentifydisputed issuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeetingorhearing. Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublicmeetingorhearingonthe proposalisdenied. 11 12CFR225.7and225.25(c).
263 Federal Reserve BULLETIN December 2012 Vol. 98, No. 7 Legal Developments: Second Quarter, 2012 Order Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act Industrial and Commercial Bank of China Limited Beijing, People’s Republic of China China Investment Corporation Beijing, People’s Republic of China Central Huijin Investment Ltd. Beijing, People’s Republic of China OrderApprovingAcquisitionof Sharesof aBank FRBOrderNo.2012–4(May9,2012) IndustrialandCommercialBankof ChinaLimited(“ICBC”),ChinaInvestmentCorporation(“CIC”),andCentralHuijinInvestmentLtd.(“Huijin”),allof Beijing,People’s Republicof China(collectively,“Applicants”),haverequestedtheBoard’sapprovalto becomebankholdingcompaniesundersection3of theBankHoldingCompanyActof 1956,asamended(“BHCAct”),1byacquiringupto80percentof thevotingsharesof The Bankof EastAsia(U.S.A.)NationalAssociation(“BEA-USA”),NewYork,NewYork.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(76FederalRegister21367(April15,2011)).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedin lightof thefactorssetforthinsection3of theBHCAct. ICBC,withtotalassetsof approximately$2.5trillion,isthelargestbankinChina.3The governmentof Chinaownsapproximately70.7percentof ICBC’ssharesthroughtheMinistryof FinanceandCICandHuijin.4Noothershareholderownsmorethan5percentof ICBC’sshares. 1 12U.S.C.§1842. 2 TheBankofEastAsia,Limited(“BEA”),HongKongSAR,People’sRepublicofChina,anditssubsidiary,EastAsia HoldingCompany,Inc.(“EAHC”),NewYork,NewYork,bothbankholdingcompanies,currentlyownallthevoting sharesofBEA-USAandwillcontinuetoown20percentofthevotingsharesofthebankaftertheproposedtransaction.BEAandEAHCwillcontinuetobebankholdingcompanieswithrespecttoBEA-USA.BEAhasanoptionto selltheremainingsharesofBEA-USAtoICBC,beginning18monthsafterconsummationofthetransaction. 3 AssetandrankingdataareasofDecember31,2011. 4 TheMinistryofFinanceownsapproximately35.3percentandCIC,indirectlythroughHuijin,ownsapproximately 35.4percentofICBC’sshares,respectively.TheNationalCouncilforSocialSecurityFundholdsapproximately4percentofICBC’sshares.CommentersassertedthatthegovernmentofChinamustfileanapplicationtobecomeabank holdingcompanyduetoitscontrolofCIC.TheBoardhasalong-standingpositionthat,asalegalmatter,foreign governmentsarenot“companies”forpurposesoftheBHCActand,therefore,arenotcoveredbytheact.SeeBanca
264 FederalReserveBulletin|December2012 ICBCengagesprimarilyinretailandcommercialbankingthroughoutChina,including HongKongSARandMacauSAR.OutsideChina,ICBCoperatessubsidiarybanksin Canada,Indonesia,Kazakhstan,Luxembourg,Malaysia,Thailand,Russia,theUnited ArabEmirates,andtheUnitedKingdomandoperatesbranchesinanumberof countries, includingAustralia,Germany,India,Japan,Luxembourg,Pakistan,Singapore,South Korea,Vietnam,Qatar,andtheUnitedArabEmirates.IntheUnitedStates,ICBCoperatesanuninsuredstatelicensedbranchinNewYorkCityandownsIndustrialand CommercialBankof ChinaFinancialServicesLLC(“ICBCFS”),NewYork,NewYork,a registeredbroker–dealerthatengagesinsecuritiesbrokerageandrisklessprincipalactivities.5ICBCisaqualifyingforeignbankingorganizationanduponconsummationof the proposal,itwouldcontinuetomeettherequirementsforaqualifyingforeignbankingorganizationunderRegulationK.6 CICisaninvestmentvehicleorganizedbytheChinesegovernmentforthepurposeof investingitsforeignexchangereserves.CICcontrolsHuijin,aChinesegovernment-owned investmentcompanyorganizedtoinvestinChinesefinancialinstitutions.7Inadditionto ICBC,HuijinownscontrollinginterestsintwoChinesebanksthatoperatebankingoffices intheUnitedStates:Bankof ChinaLimitedandChinaConstructionBankCorporation, bothalsoof Beijing.8UndertheInternationalBankingAct,anyforeignbankthatoperates abranch,agency,orcommerciallendingcompanyintheUnitedStates,andanycompany thatcontrolstheforeignbank,issubjecttotheBHCActasif theforeignbankorcompany wereabankholdingcompany.9Asaresult,CICandHuijinaresubjecttotheBHCActas if theywerebankholdingcompanies.10Throughtheproposedacquisitionof BEA-USA, ApplicantswouldbecomebankholdingcompaniesundertheBHCAct. BEA-USA,withtotalconsolidatedassetsof approximately$780millionanddepositsof approximately$621million,11engagesinretailandcommercialbankingintheUnited States.BEA-USAoperates13branchesinNewYorkandCalifornia. CommercialeItaliana,68FederalReserveBulletin423,425(1982).However,theBoardhasdeterminedthatforeigngovernment-ownedcorporationsareconsidered“companies”undertheBHCAct.SeeBoardlettersto PatriciaSkigen,Esq.,datedAugust19,1988;toH.RodginCohen,Esq.,datedAugust5,2008;andtoArthur S.Long,Esq.,datedNovember26,2008.Theforeigngovernment-ownedcompaniesthatcontrolICBC—CIC andHuijin—havefiledtobecomebankholdingcompaniesinthiscase. 5 ICBCreceivedapprovaltoacquireICBCFSundersection4(c)(8)oftheBHCAct.12U.S.C.§1843(c)(8).See FederalReserveBankofNewYorklettertoDouglasLandy,Esq.,datedJune25,2010. 6 12CFR211.23(a). 7 CICalsoownsanoncontrollinginterestinMorganStanley,NewYork,NewYork.SeeChinaInvestmentCorporation,96FederalReserveBulletinB31(2010)(“CICOrder”). 8 BankofChinaLimitedoperatestwograndfatheredinsuredfederalbranchesinNewYorkCityandalimited uninsuredfederalbranchinLosAngelesandhasreceivedBoardapprovaltoestablishanadditionaluninsured federalbranchinChicago.BankofChinaLimited,FRBOrderNo.2012-6(May9,2012).BankofChinaLimitedalsocontrolsawhollyownedsubsidiarybank,NanyangCommercialBank,Limited,HongKongSAR, People’sRepublicofChina,thatoperatesanuninsuredfederalbranchinSanFrancisco.ChinaConstruction BankCorporationoperatesanuninsuredstate-licensedbranchandarepresentativeofficeinNewYorkCity. HuijinalsoownsacontrollinginterestinAgriculturalBankofChinaLimited,Beijing,People’sRepublicof China,whichoperatesarepresentativeofficeinNewYorkCityandhasreceivedBoardapprovaltoestablishan uninsuredstate-licensedbranchinNewYorkCity.AgriculturalBankofChinaLimited,FRBOrderNo. 2012-5(May9,2012). 9 12U.S.C.§3106. 10 TheBoardpreviouslyprovidedcertainexemptionstoCICandHuijinundersection4(c)(9)oftheBHCAct, whichauthorizestheBoardtogranttoforeigncompaniesexemptionsfromthenonbankingrestrictionsofthe BHCActwhentheexemptionswouldnotbesubstantiallyatvariancewiththepurposesoftheactandwould beinthepublicinterest.See12U.S.C.§1843(c)(9).TheexemptionsprovidedtoCICandHuijindonotextend toICBC,BankofChinaLimited,ChinaConstructionBankCorporation,oranyotherChinesebankingsubsidiaryofCICorHuijinthatoperatesabranchoragencyintheUnitedStates.SeeBoardletterdated August5,2008,toH.RodginCohen,Esq. 11 DepositdataareasofDecember31,2011.
LegalDevelopments:SecondQuarter,2012 265 CompetitiveConsiderations TheBoardhasconsideredthecompetitiveeffectsof theproposalinlightof allthefactsof therecord.Section3of theBHCActprohibitstheBoardfromapprovingaproposalthat wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitsthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalclearlyareoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.12 BEA-USAoperatesinNewYorkandinCalifornia.Asnoted,Bankof ChinaLimited maintainsinsuredbranchesinNewYorkCitythatcompetedirectlywithBEA-USAinthe metropolitanNewYork-NewJersey-Pennsylvania-Connecticut(“MetropolitanNew York”)bankingmarket.13CICalsoownsanoncontrollinginterestinMorganStanley, whichcompetesinthatmarket.TheBoardhasreviewedthecompetitiveeffectsof theproposalintheMetropolitanNewYorkbankingmarketinlightof allthefactsof record.In particular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthe bankingmarket,therelativesharesof totaldepositsindepositoryinstitutionsinthemarket (“marketdeposits”)controlledbyrelevantinstitutions,14andtheconcentrationlevelof marketdepositsandtheincreaseinthatlevelasmeasuredbytheHerfindahl-Hirschman Index(“HHI”)undertheDepartmentof JusticeMergerGuidelines(“DOJGuidelines”)as if CICcontrolledMorganStanley.15 12 12U.S.C.§1842(c)(1).Seee.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin555(1996).Onecommenter conjectured,withoutprovidinganysupportinginformation,thatthisproposalwouldresultinananticompetitiveeffectfortheUnitedStatesbankingsystemifICBC’sprimarypurposeistocontrolorstronglyinfluencetheU.S.financialsystem.Inadditiontothefactscitedbelow,theBoardnotesthatBEA-USAisrelatively smallandthatBEA-USA,theownershipandoperationofBEA-USAbyApplicants,andtheactivitiesof ApplicantsintheUnitedStatesaresubjecttothesupervisory,examination,andenforcementauthorityofthe federalbankingagencies,includingtheBoard,andtoallapplicableU.S.laws,includingbankingandfinancial laws.Inaddition,anysubsequentbankacquisitionsorcommencementofadditionalbankingactivitiesby ApplicantsintheUnitedStatesaresubjecttothesamestandards,includingantitrustandfinancialstability standards,thatareapplicabletosimilarproposalsbydomesticorganizations. 13 TheMetropolitanNewYorkbankingmarketincludesBronx,Dutchess,Kings,Nassau,NewYork,Orange, Putnam,Queens,Richmond,Rockland,Suffolk,Sullivan,Ulster,andWestchesterCountiesinNewYork;Bergen,Essex,Hudson,Hunterdon,Mercer,Middlesex,Monmouth,Morris,Ocean,Passaic,Somerset,Sussex, Union,andWarrenCountiesandthenorthernportionofMercerCountyinNewJersey;MonroeandPike CountiesinPennsylvania;andFairfieldCountyandportionsofLitchfieldandNewHavenCountiesinConnecticut. ApplicantsdonotcurrentlycompetewithBEA-USAinanyotherrelevantbankingmarket.ICBCandChina ConstructionBankCorporationoperatebranchofficesintheMetropolitanNewYorkbankingmarket.Bank ofChinaLimitedoperatesabranchinLosAngelesandBankofChinaLimited’ssubsidiary,NanyangCommercialBank,Limited,operatesabranchinSanFrancisco.NoneofthesebranchesisinsuredbytheFederal DepositInsuranceCorporation,andthesebranchesgenerallycannotacceptretaildeposits. 14 Callreport,deposit,andmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthe summaryofdepositsdataasofJune30,2011.Thedataarealsobasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.Seee.g.,MidwestFinancialGroup,Inc.,,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.Seee.g.,FirstHawaiian,Inc,77FederalReserveBulletin52(1991). 15 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepostmergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points. AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontalMergerGuidelines, theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin1995,werenot changed.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html.
266 FederalReserveBulletin|December2012 Consummationof theacquisitionwouldbeconsistentwithBoardprecedentandwithin thethresholdsintheDOJGuidelinesintheMetropolitanNewYorkbankingmarket.On consummation,thebankingmarketwouldremainmoderatelyconcentratedasmeasuredby theHHI,whichwouldremainunchangedat1401.Inaddition,numerouscompetitors wouldremaininthemarket,whichwouldcontinuetohave270insureddepositoryinstitutioncompetitorsuponconsummationof thisproposal.Thecombineddepositsof therelevantinstitutionsintheMetropolitanNewYorkbankingmarketrepresentlessthan1percentof marketdeposits. TheDOJalsohasreviewedthematterandhasadvisedtheBoardthattheDOJdoesnot believethattheacquisitionof BEA-USAbyCIC,Huijin,andICBCwouldbelikelyto haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theOfficeof theComptrollerof theCurrency(“OCC”)andtheFederalDeposit InsuranceCorporation(“FDIC”)havebeenaffordedanopportunitytocommentandhave notobjectedtothetransaction. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of bankingresourcesinanyrelevantbankingmarketandthatcompetitivefactorsareconsistentwithapprovalof theproposal. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedinthe proposalaswellastheeffectivenessof thesecompaniesincombattingmoney-laundering activities.16Section3of theBHCActalsorequirestheBoardtodeterminethatan applicanthasprovidedadequateassurancesthatitwillmakeavailabletotheBoardsuch informationonitsoperationsandactivitiesandthoseof itsaffiliatesthattheBoarddeems appropriatetodetermineandenforcecompliancewiththeBHCAct.17 Thereviewwasconductedinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationregardingICBC’sU.S.operationsandBEA-USA,publiclyreportedandotherfinancialinformation,andinformationprovidedbyApplicantsand bypubliccommenters.TheBoardalsohasconsultedwiththeChinaBankingRegulatory Commission(“CBRC”),theagencywithprimaryresponsibilityforthesupervisionand regulationof Chinesebankingorganizations,includingICBC.18 Inevaluatingfinancialfactors,theBoardreviewsthefinancialconditionof theapplicants andthetargetdepositoryinstitutions.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.19The Boardalsoevaluatesthefinancialconditionof thecombinedorganizationandtheimpact of theproposedfundingof thetransaction.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. Applicantsarelargerelativetothesizeof BEA-USAandhavesubstantialfinancial resourcestoconsummatetheproposalandtoprovideongoingfinancialsupporttoBEA- 16 Thediscussionoftheeffectivenessoftheanti-money-launderingeffortsofApplicantsandtheirhomecountry supervisorsisincludedintheexplanationoftheBoard’sassessmentofwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesintheirhomecountry. 17 12U.S.C.§1842(c)(3)(A). 18 TheCBRCapprovedICBC’sapplicationtoacquire80percentofBEA-USAonMarch10,2011. 19 CommentersexpressedconcernsregardingICBC’scapitaladequacy.
LegalDevelopments:SecondQuarter,2012 267 USA.Asdiscussedmorefullybelow,theCBRCrequiresChinesebankstofollowtheBasel ICapitalAccordwithcertainenhancementsfromtheBaselIICapitalAccord.20Thecapitallevelsof ICBCexceedtheminimumlevelsthatwouldberequiredundertheBaselI CapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldbe requiredof aU.S.bankingorganizationseekingtoacquireanorganizationof thesizeand profileof BEA-USA.TheBoardnotesthatICBCengagesinarelativelytraditionalsetof commercialbankingactivities.ICBC’sreportedassetqualityindicators,includingnonperformingloansandreservesforloanlosses,areconsistentwithapprovalof theproposal. ICBChasimplementedenhancementstoitsinternalriskmanagementandinternalcontrol frameworktomonitorandmanageitsassetquality.ICBC’searningsperformancealsois consistentwithapproval. Theproposedtransactionisstructuredasacashpurchaseof shares.ICBCwilluseexisting resourcestofundthepurchaseof sharesandhassufficientfinancialresourcestoeffectthe proposal.BEA-USAiswellcapitalizedandwouldremainsoonconsummation.Inlightof thesizeof ICBCinrelationtoBEA-USA,thetransactionwouldhaveaminimalimpacton ICBC’sfinancialcondition.Inaddition,ICBCwouldhavethefinancialresourcestoprovidecontinuedfinancialsupporttoBEAUSAasneeded. CICandHuijinaregovernment-ownedinvestmentcompaniesthatwerecapitalizedbythe governmentof Chinatoinvestthegovernment’sforeignexchangereserves.CIC’sassetsare primarilycomposedof long-termequityinvestmentsandfinancialassetssuchasequities andfixed-incomesecurities.Huijininvestssolelyinthesharesof Chinesefinancial institutions. Inconsideringthemanagerialresourcesof theorganizationsinvolvedandtheproposed combinedorganization,theBoardhasreviewedtheexaminationrecordsof ICBC’sU.S. operationsandBEA-USA,includingassessmentsof theirmanagement,riskmanagement systems,andoperations.TheBoardhasalsoconsideredICBC’splansforimplementingthe proposalandfortheproposedmanagementof BEA-USAafterconsummation.Asnoted, theBoardhasconsultedwiththeCBRC.Inaddition,theBoardhasconsideredthe managerialresourcesandfutureprospectsof CICandHuijininlightof thefactthatCIC andHuijinaregovernment-ownedinvestmentcompanies.TheBoardalsohasconsidered itssupervisoryexperiencesandthoseof theotherrelevantbanksupervisoryagencieswith theorganizations,includingconsultationsinconnectionwiththisproposal,andtheir recordsof compliancewithapplicablebankingandanti-money-launderinglaws.ICBC planstograduallyintegrateBEA-USAintoitsoperationsandriskmanagementsystems, drawingonexperiencesfromitsintegrationof theBankof EastAsia(Canada),Toronto, Canada,whichICBCacquiredin2010.ICBChasrepresentedthatitwilldevoteadequate financialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal. TheBoardhasconsideredthefutureprospectsof ApplicantsandBEA-USAinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplanforBEA USA.ICBCplanstocontinueBEA-USA’slendingandotheractivitiesinthemarketsand communitiesservedbyBEA-USA’sbranches.ICBC’smanagementhastheexperienceand resourcestoensurethatBEA-USAoperatesinasafeandsoundmanner.TheBoardhas alsoconsideredthelevelof capitalthatApplicantswillhaveonconsummationtosupport BEA-USA’scurrentoperationsandanyfutureexpansion. 20 TheCBRCalsorequiresalllarge,internationallyactivebanks,suchasICBC,tohaveaminimum tier1risk-basedcapitalratioof9percentandatotalrisk-basedcapitalratioof11.5percent.ICBC’scapital ratiosexceedtheselevels.
268 FederalReserveBulletin|December2012 Inaddition,theBoardhasassessedwhetherApplicantshaveprovidedadequateassurances toprovideinformationtotheBoard,asrequiredbytheBHCAct.Applicantshavecommittedthat,totheextentnotprohibitedbyapplicablelaw,theywillmakeavailabletothe Boardsuchinformationontheiroperationsandtheoperationsof theiraffiliatesthatthe BoarddeemsnecessarytodetermineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,andotherapplicablefederallaws.Applicantsalsohavecommittedto cooperatewiththeBoardtoobtainanywaiversorexemptionsthatmaybenecessaryto enablethemortheiraffiliatestomakesuchinformationavailabletotheBoard.TheBoard hasconsultedwiththeCBRCaboutaccesstoinformation.TheCBRChasrepresentedthat itwouldfacilitatetheBoard’saccesstoinformation,andithasenteredintoastatementof cooperationwiththeBoardandotherU.S.bankingregulatorswithrespecttothesharing of supervisoryinformation.21Moreover,U.S.bankregulatorsparticipatedinthe November2009supervisorycollegeforICBChostedbytheCBRC. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellasaccesstoinformationbytheBoard,areconsistentwithapproval. SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplication,andasrequiredbysection3of theBHCAct,theBoardhas consideredwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationona consolidatedbasisbyappropriateauthoritiesintheirhomecountry.22TheBoardhaslong heldthat“thelegalsystemsforsupervisionandregulationvaryfromcountrytocountry, andcomprehensivesupervisionorregulationonaconsolidatedbasiscanbeachievedin differentways.23Inapplyingthisstandard,theBoardhasconsideredtheBaselCorePrinciplesforEffectiveBankingSupervision(“BaselCorePrinciples”),24whicharerecognized astheinternationalstandardforassessingthequalityof banksupervisorysystems,includingwithrespecttocomprehensive,consolidatedsupervision(“CCS”).25 ICBC:Foranumberof years,authoritiesinChinahavecontinuedtoenhancethestandardsof consolidatedsupervisiontowhichbanksinChinaaresubject,includingthrough additionalorrefinedstatutoryauthority,regulations,andguidance;adoptionof interna- 21 SeeMemorandumofUnderstandingbetweentheCBRCandtheBoard,theOfficeoftheComptrollerofthe Currency,andtheFederalDepositInsuranceCorporation,June17,2004 22 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR 225.13(a)(4).RegulationKprovidesthataforeignbankissubjecttoconsolidatedhomecountrysupervisionif theforeignbankissupervisedorregulatedinsuchamannerthatitshomecountrysupervisorreceivessufficient informationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoany affiliate)toassesstheforeignbank’soverallfinancialconditionandcompliancewithlawandregulation. 12CFR211.24(c)(1)(ii).Inassessingthisstandardundersection211.24ofRegulationK,theBoardconsiders, amongotherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors:(i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetween thebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandrisk assetexposure,onaworldwidebasis.Nosinglefactorisdeterminative,andotherelementsmayinformthe Board’sdetermination. 23 57FederalRegister12992,12995(April15,1992). 24 BankforInternationalSettlements,BaselCommitteeonBankingSupervision,CorePrinciplesforEffective BankingSupervision(October2006),availableatwww.bis.org/publ/bcbs129.pdf. 25 See,e.g.,93rdAnnualReportoftheBoardofGovernorsoftheFederalReserveSystem(2006),at76(“The CorePrinciples,developedbytheBaselCommitteein1997,havebecomethedefactointernationalstandard forsoundprudentialregulationandsupervisionofbanks.”).
LegalDevelopments:SecondQuarter,2012 269 tionalstandardsandbestpractices;enhancementstothesupervisorysystemarisingoutof supervisoryexperiences;upgradestotheCBRCintheareasof organization,technological capacity,staffing,andtraining;andincreasedcoordinationbetweentheCBRCandother financialsupervisoryauthoritiesinChina.26 TheBoardhasreviewedtherecordinthiscaseandhasdeterminedthattheenhancements tostandardsof banksupervisioninChinawarrantafindingthatICBCissubjecttoCCS byitshomecountrysupervisors.Inmakingthisdetermination,theBoardhasconsidered thattheCBRCistheprincipalsupervisoryauthorityof ICBC,includingitsforeignsubsidiariesandaffiliates,forallmattersotherthanmoneylaundering.27TheCBRChasprimary responsibilityandauthorityforregulatingtheestablishmentandactivitiesandtheexpansionanddissolutionof bankinginstitutions,bothdomesticallyinChinaandabroad.The CBRCmonitorsChinesebanks’consolidatedfinancialcondition,compliancewithlaws andregulations,andinternalcontrolsthroughacombinationof on-siteexaminations,offsitesurveillancethroughthereviewof requiredregulatoryreportsandexternalaudit reports,andinteractionwithseniormanagement. Sinceitsestablishmentin2003,theCBRChasaugmenteditssupervisorystructure,staffing,andinternaloperations;enhanceditsexistingsupervisoryprograms;anddeveloped newpoliciesandprocedurestocreateaframeworkfortheconsolidatedsupervisionof the largestbanksinChina.TheCBRCalsohasstrengtheneditssupervisoryregimerelatedto accountingrequirementsandstandardsforloanclassification,internalcontrols,riskmanagement,andcapitaladequacy,andithasdevelopedandimplementedariskfocusedsupervisoryframework. TheCBRChasissuedadditionalguidanceinvarioussupervisoryareas,includingstricter prudentialrequirementsforcapital,loan-lossallowancecoverage,executivecompensation, banks’equityinvestmentsininsurancecompanies,andenhancedrisk-managementrequirementsforoperations,liquidity,derivatives,reputational,andmarketrisk.Theguidanceis designedtomakesupervisionmoreriskfocusedandtostrengthenpracticesconsistentwith theBaselCorePrinciples. TheCBRChasitsheadofficeinBeijingandbranchofficesinotherprovinces.Thehead officesetspolicyanddirectssupervisoryactivitiesforthelargestbanksinChina,including ICBC.Althoughsomeday-to-daysupervisoryactivitiesareundertakenbytheCBRC’s branchoffices,theheadofficedirectstheseeffortsandensuresconsistencyof approach throughtrainingprogramsandfrequentcommunicationwiththebranches. TheCBRCheadofficepreparesannualexaminationplansforthelargestChinesebanks, includingICBC.Theplansencompassbothon-andoff-siteactivities.ApplicableChinese lawandbankingregulationdonotrequirethaton-siteexaminationsbeconductedatany specifiedinterval.Inpractice,theCBRCperformson-siteexaminationsof itslargestbanks frequently,althoughoff-sitesurveillanceiscontinuous.On-siteexaminationsarescheduled 26 TheBoardhaspreviouslyapprovedapplicationsfromChinesebanks,includingICBC,toestablishU.S. branchesunderalowerstandardthantheCCSstandard.SeeChinaMerchantsBankCo.,Limited,94Federal ReserveBulletinC24(2008);IndustrialandCommercialBankofChinaLimited,94FederalReserveBulletinC114 (2008);ChinaConstructionBankCorporation,95FederalReserveBulletinB54(2009);andBankofCommunicationsCo.,Ltd.(orderdatedApril8,2011),97FederalReserveBulletin49(2ndQuar.2011).Ineachcase,the Boardmadeadeterminationthatthebank’shomecountrysupervisorswereactivelyworkingtoestablish arrangementsfortheconsolidatedsupervisionofthebank.12U.S.C.§3105(d)(6). 27 BeforeApril2003,thePeople’sBankofChina(“PBOC”)actedasbothChina’scentralbankandprimary bankingsupervisor,includingwithrespecttoanti-money-launderingmatters.InApril2003,theCBRCwas establishedastheprimarybankingsupervisorandassumedthemajorityofthePBOC’sbankregulatoryfunctions.ThePBOCmaintaineditsrolesasChina’scentralbankandprimarysupervisorforanti-money-launderingmatters.
270 FederalReserveBulletin|December2012 basedontheCBRC’scontinuousoff-sitemonitoringtools,analysisof theinstitution’speriodicfilings,resultsof theinstitution’sinternalstresstesting,andtheinstitution’soverall riskprofileandactivities.On-siteexaminationsbytheCBRCtypicallycover,amongother things,themajorareasof operation:corporategovernanceandseniormanagement responsibilities;capitaladequacy;assetstructureandassetquality(includingstructureand qualityof loans);off-balance-sheetactivities;earnings;liquidity;liabilitystructureand fundingsources;expansionaryplans;internalcontrols(includingaccountingcontroland administrativesystems);legalcompliance;accountingsupervisionandinternalauditing; andanyotherareasdeemednecessarybytheCBRC.ThePBOCexaminesICBCforcompliancewithanti-money-launderinglawsandrequirements. ExaminationratingsarebasedontheCAMELSratingmodelandemphasizecredit-risk management,thequalityof thebank’sloanportfolio,internalcontrols,liabilitystructure, capitaladequacy,liquidity,andtheadequacyof reserves.Theareasof emphasisreflectthe factthatthelargestChinesebanks,includingICBC,engageintraditionalcommercial bankingandarenotmateriallyengagedincomplexderivativesorotheractivities.Ratings arederivedfromoff-sitequantitativeandqualitativeanalysisandonsiteriskreviews. Examinationfindingsandareasof concernarediscussedwithseniormanagementof the bank,andcorrectiveactionstakenbythebankaremonitoredbytheCBRC.In2009,the CBRCdevelopedaninformationtechnologysystemtoassistinon-siteexaminationsby improvingdataanalysisandregulatoryinformationsharing. ChinesebanksarerequiredtoreportkeyregulatoryindicatorstotheCBRCperiodicallyon generalschedules.AllChinesebanksarerequiredtosubmitmonthly,quarterly,semiannual,orannualreportsrelatingtoassetquality,lendingconcentrations,capitaladequacy, earnings,liquidity,affiliatetransactions,off-balance-sheetexposures,internalcontrols,and ownershipandcontrol. BanksmustreporttotheCBRCtheirunconsolidatedcapitaladequacyratiosquarterlyand theirconsolidatedratiossemiannually.China’sbankcapitalrulesarebasedontheBaselI CapitalAccord,whiletakingintoaccountcertainaspectsof theBaselIICapitalAccord.In addition,theCBRC,asamemberof theBaselCommitteeonBankingSupervision,has supportedtheBaselIIICapitalAccordframeworkandimplementationtimeframe.The CBRCcantakeenforcementactionswhencapitalratiosorotherfinancialindicators fallbelowspecifiedlevels.Theseactionsmayincludeissuingsupervisorynotices,requiring thebanktosubmitandimplementanacceptablecapitalreplenishmentplan,restricting assetgrowth,requiringreductionof higherriskassets,restrictingthepurchaseof fixed assets,andrestrictingdividendsandotherformsof distributions.Significantlyundercapitalizedbanksmayberequiredtomakechangesinseniormanagementorrestructuretheir operations. ICBC,likeotherlargeChinesebanks,isrequiredtobeauditedannuallybyanexternal accountingfirmthatmeetsthestandardsof Chineseauthorities,includingtheMinistryof Finance,PBOC,andCBRC,andtheauditresultsaresharedwiththeCBRCandPBOC. Thescopeof therequiredauditincludesareviewof ICBC’sfinancialstatements,asset quality,capitaladequacy,internalcontrols,andcompliancewithapplicablelaws.Atitsdiscretion,theCBRCmayorderaspecialauditatanytime.Inaddition,inconnectionwithits listingontheShanghaiandHongKongstockexchanges,ICBCisrequiredtoreportfinancialstatementsunderbothInternationalFinancialReportingStandards(“IFRS”)andChi-
LegalDevelopments:SecondQuarter,2012 271 neseAccountingStandards(“CAS”).28ThesefinancialstatementsareauditedbyaninternationalaccountingfirmunderapplicableIFRSauditingstandards.29 ICBCconductsinternalauditsof itsofficesandoperations,includingitsoverseasoperations,generallyonanannualschedule.TheinternalauditresultsaresharedwiththeCBRC, thePBOC,andICBC’sexternalauditors. Chineselawimposesvariousprudentiallimitationsonbanks,includinglimitsontransactionswithaffiliatesandonlargeexposures.30Related-partytransactionsincludecredit extensions,assettransfers,andtheprovisionof anytypeof services.Chinesebanksare requiredtoadoptappropriatepoliciesandprocedurestomanagerelated-partytransactions andtheboardof directorsmustappointacommitteetosupervisesuchtransactionsand relationships.Applicablelawsrequireallrelated-partytransactionstobeconductedonan arm’s-lengthbasis. Chinesebankinglawalsoestablishessingle-borrowercreditlimits.Loanstoasingleborrowermaynotexceed10percentof thebank’stotalregulatorycapital,theaggregatelendingtoagroupof relatedcompaniesmaynotexceed15percentof thebank’stotalregulatorycapital,andtheaggregateamountof creditgrantedtoallrelatedpartiesmaynot exceed50percentof thebank’stotalregulatorycapital.Thestatusof related-partytransactionsmustbereportedtotheCBRCquarterly. Inaddition,theCBRChascertainoperationallimitationsforcommercialbanksinChina relatingtomatterssuchasliquidityandforeigncurrencyexposure.In2009,theCBRC issuednewrulesconcerningliquiditymanagementandcorporategovernance.Compliance withtheselimitsismonitoredbytheCBRCthroughperiodicreportsandreviewedduring on-siteexaminations. 28 Basedprimarilyonnewspaperreports,severalcommenterscriticizedthereliabilityandaccuracyofChinese accountingmethods.ThesenewspaperarticlesfocusonChinesefirmsthatarelistedonU.S.exchangesthrough aprocesscalled“reversemergers”wherebytheChinesefirmacquiresalistedU.S.firmandtherebybecomesa listedfirm.ThesearticlesallegethatthelistedChinesefirmshavereportedunreliablefinancialstatements auditedbyChineseauditingfirms.China’slargestbanks,suchasICBC,usethe“BigFour”accountingfirms. ThereisnoevidencethatChineseaccountingmethodsorpracticesatthelargeChinesebanks,suchasICBC, areunreliable.TheInternationalMonetaryFund’s(“IMF”)financialsystemstabilityassessmentreportandthe accompanyingdetailedassessmentreportofobservancewiththeBaselCorePrinciples,discussedindetail below,bothfoundthat“[s]ince2005,[CAS]havesubstantiallyconvergedwith[IFRS]andInternationalStandardsonAuditing,respectively.”IMF,People’sRepublicofChina,FinancialSystemStabilityAssessmentat57 (June24,2011);IMFandWorldBank,People’sRepublicofChina:DetailedAssessmentReportofObservancewithBaselCorePrinciplesforEffectiveBankingSupervisionat9(April2012).Inaddition,theWorld BankReportonObservanceofStandardsandCodesdeterminedthatCASandIFRSarebasicallycompatible andthattheChineseauthoritiesandtheInternationalAccountingStandardsBoardhaveestablishedacontinuingconvergencemechanismdesignedtoachievefullconvergencein2012.WorldBank,ReportonObservance ofStandardsandCodes(ROSC)AccountingandAuditing–People’sRepublicofChinaatExecutiveSummaryandat12(October2009),availableatwww.worldbank.org/ifa/rosc_aa_chn.pdf. 29 Thecommentersalsoassertedthatthe“BigFour”accountingfirmsintheUnitedStates,includingtheparent companyofICBC’sauditor,Ernst&Young,weresubstantiallyfinedfordepartingfromU.S.generally acceptedaccountingprinciples(“U.S.GAAP”).Thecommentersargued,withoutprovidinganysupporting data,thatanyoperationaldeficienciesintheUnitedStatesbyErnst&YoungshouldbeimputedtoICBC’s auditorandfinancialstatements,andtheyrequestedthattheBoardrequireICBCtosubmitfinancialdata auditedbyafullyindependentauditingfirmthathasnotbeenthesubjectofsubstantialcriticismsbythePublicCompanyOversightAccountingBoard(“PCAOB”)orotherregulatorybody.TheBoardnotesthatthe PCAOBdidsanctionErnst&Youngforfailingtoproperlyevaluateaspecificcompany’ssalesreturnsreserves, whichthePCAOBfoundwerebothamaterialcomponentofthatcompany’sfinancialstatementsandnotin conformitywithU.S.GAAP.ThePCAOBdidnotfindthatthiswasawidespreadpracticebyErnst&Young orindicativeofbehaviorbyanyofitsforeignaccountingoperations. 30 TheCBRCdefinitionofan“affiliate”ora“relatedparty”ofabankincludessubsidiaries,associates/jointventures,shareholdersholding5percentormoreofthebank’sshares,andkeymanagementpersonnel(and immediaterelatives)andthoseindividuals’otherbusinessaffiliations.
272 FederalReserveBulletin|December2012 TheCBRCisauthorizedtorequireanybanktoprovideinformationandtoimposesanctionsforfailuretocomplywithsuchrequests.If theCBRCdeterminesthatabankisnotin compliancewithbankingregulationsandprudentialstandards,itmayimposevarious sanctionsdependingupontheseverityof theviolation.TheCBRCmaysuspendapproval of newproductsornewoffices,suspendpartof thebank’soperations,imposemonetary penalties,andinmoreseriouscases,replacemanagementof thebank.TheCBRCalsohas authoritytoimposeadministrativepenalties,includingwarningsandfinesforviolationsof applicablelawsandrules.Criminalviolationsaretransferredtothejudicialauthoritiesfor investigationandprosecution. ICBCissubjecttosupervisionbyseveralotherfinancialregulators,includingtheState AdministrationforForeignExchange,ChinaSecuritiesRegulatoryCommission (“CSRC”),andChinaInsuranceRegulatoryCommission(“CIRC”).Theseagenciesreceive periodicfinancialandoperationsreports,andtheymayconducton-siteexaminationsand imposeadditionalreportingrequirements.Chinesefinancialsupervisorscoordinate supervisionandsharesupervisoryinformationaboutChinesefinancialinstitutionsas appropriate. AuthoritiesinChinaalsohaveincreasedcooperationwithinternationalgroupsandsupervisoryauthoritiesinothercountriesregardingbanksupervision.Inparticular,theCBRC hasestablishedmechanismstocooperatewithsupervisoryauthoritiesinatleast25other countriesforthesupervisionof cross-borderbanking.Inaddition,thePBOCandCBRC officiallyjoinedtheBaselCommitteeonBankingSupervisiononbehalf of Chinaandsince theiraccession,haveactivelyparticipatedintherevisionof theBaselIICapitalAccord,in theformulationof theBaselIIICapitalAccord,andinotherworkinggroups.Chinaalsois activeintheongoingworkof theFinancialStabilityBoard.Inaddition,thePBOC,CBRC, otherfinancialsupervisoryagencies,andotheragenciesinChinahavetakenjointmeasures tomaintainfinancialstability.31Moreover,authoritiesintheUnitedStatesandChinathat areresponsiblefortheoversightof auditingservicesforpubliccompaniesareengagedin continuingdiscussionswithrespecttoenhancingcross-bordercooperation,andtheBoard looksforwardtotimelynegotiationof anagreementrelatingtocooperativeactionsby theseauthorities. TheIMFrecentlyconcludedafinancialsystemstabilityassessmentof China(“FSSA”), includinganassessmentof China’scompliancewiththeBaselCorePrinciples.32TheFSSA determinedthatChina’soverallregulatoryandsupervisoryframeworkadherestointernationalstandards.33TheFSSAfoundthat“[t]helaws,rulesandguidancethatCBRCoperatesundergenerallyestablishabenchmarkof prudentialstandardsthatisof highquality andwasdrawnextensivelyfrominternationalstandardsandthe[BaselCorePrinciples] 31 Chinahasestablishedasystemofpreliminaryindicatorsformonitoringfinancialstability,developedmethodologyandoperationalframeworksformonitoringfinancialrisks,andpublishedanannualChinaFinancialStabilityReportsince2005. 32 TheassessmentreflectstheregulatoryandsupervisoryframeworkinplaceasofJune24,2011.IMF,People’s RepublicofChina,FinancialSystemStabilityAssessment(June24,2011),availableatwww.imf.org/external/ pubs/ft/scr/2011/cr11321.pdf.TheFSSAcoversanevaluationofthreecomponents:(1)thesource,probability, andpotentialimpactofthemainriskstomacrofinancialstabilityinthenearterm;(2)thecountry’sfinancial stabilitypolicyframework;and(3)theauthorities’capacitytomanageandresolveafinancialcrisisshouldthe risksmaterialize.TheFSSAisakeyinputtoIMFsurveillance.TheFSSAisaforward-lookingexercise,unlike theBoard’sassessmentofthecomprehensive,consolidatedsupervisionofanapplicant. TheIMFandWorldBankseparatelypublishadetailedassessmentofthecountry’sobservanceoftheBasel CorePrinciplesthatdiscussesthecountry’sadherencetotheBaselCorePrinciplesinmuchgreaterdetail.See IMFandWorldBank,People’sRepublicofChina:DetailedAssessmentReportofObservancewithBasel CorePrinciplesforEffectiveBankingSupervision(April2012)(“DAR”),availableatwww.imf.org/external/ pubs/ft/scr/2012/cr1278.pdf. 33 FSSAat39.
LegalDevelopments:SecondQuarter,2012 273 themselves.”34TheFSSAadditionallynotedthat“[c]onsolidatedsupervisionof banksand theirdirectsubsidiariesandbranchesonthemainlandoroffshoreisof highquality.”35 WithrespecttotheCBRC,theFSSAfoundasfollows:Allthebanks,auditors,ratings agenciesandothermarketparticipantsthatthemissioninteractedwithwereunhesitating intheirregardfortherolethattheCBRChasplayedindrivingprofessionalism,riskmanagementandinternationalrecognitionof theChinesebankingsystem.Inparticular,the missionobservedthat[theCBRC]hasbeenthekeydrivingforceindrivingimprovements inriskmanagement,corporategovernanceandinternalcontrolanddisclosureinChinese banks.36 Basedonitsreview,theFSSAratedChina’soverallcompliancewiththeBaselCorePrinciplesassatisfactory.Ingivingthisoverallrating,theFSSAnotedseveralareasthatmeritedimprovementandmadespecificrecommendationsforcontinuedadvancesinsupervisionandregulation.37TheChineseauthoritiesnotedthatsomeof therecommendationsof theFSSAarealreadybeingimplemented,andotherswillbetakenintoaccountinthe CBRC’splanstoimprovesupervisoryeffectiveness.38 TheBoardhastakenintoaccounttheFSSA’sviewsthatChinais,overall,insatisfactory compliancewiththeBaselCorePrinciplesandthatthereareareasforfurtherimprovement.TheBoardhasalsotakenintoaccounttheresponsesbyChineseauthoritiestothe FSSAreportandtheprogressmadebyChineseauthoritiestoaddresstheissuesraisedin thatreport. Basedonallthefactsof record,includingitsreviewof thesupervisoryframeworkimplementedbytheCBRCforICBC,theBoardhasdeterminedthatICBCissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.ThisdeterminationisspecifictoICBC.39Bystatute,theBoardmustreviewthisdeterminationin processingfutureapplicationsinvolvingICBCandalsomustmakeadeterminationof comprehensive,consolidatedsupervisioninotherapplicationsinvolvingdifferentapplicantsfromChina. 34 FSSAat59;DARat12. 35 FSSAat64;DARat16. 36 DARat7. 37 FSSAat39-42and69-71;DARat99-101.Chinareceivedamateriallynoncompliantratingintwoofthethirty areasassessedbytheFSSA.Specifically,theFSSAratedChinaasmateriallynoncompliantfortheBaselCore Principlesonindependence,accountabilityandtransparency,andriskmanagementprocess.DARat17and19. TheFSSAstatedthat“budgetingarrangements,externalheadcountapprovalrequirementsand[theauthority fortheStateCounciltooverride]rulesanddecisionscompromiseCBRCeffectivenessandcouldaffectoperationalindependence.”FSSAat64;DARat17.TheFSSAviewedtheguidancethattheCBRChasissuedinrisk managementtobeconsistentwithinternationalstandardsbutfoundthatbankinginstitutions’compliance withCBRCguidancewaslacking(althoughrecognizingthattheguidanceonsomerisks“isrecentandsocould notbeexpectedtobecompliedwithasyet”).FSSAat61;seealsoDARat53.Theassessmentteamalso believedthatChinesebanksingeneraldonotyethaverobustenterprise-widerisk-managementsystems.FSSA at66;DARat53-54.Forcomparison,theUnitedKingdomandGermanyreceivedthreeandtwomaterially noncompliantratings,respectively,andtheUnitedStatesreceivedonemateriallynoncompliantrating,intheir recentfinancialsystemstabilityassessments. 38 FSSAat71-73;DARat101-103.Chineseauthoritiesrespondedthat,bylawinChina,theStateCouncilofthe People’sRepublicofChina(“StateCouncil”)mayalterorannularuleorguidelineoftheCBRConlyifthe ruleorguidelineviolatesapplicablelawandthattheStateCouncilhasneveralteredorannulledtherulesand guidelinesissuedbytheCBRC.ChineseauthoritiesalsonotedthattheStateCouncilhassupportedtheCBRC inundertakingbankingregulationandsupervisionandthattheCBRChasupgradedthenumberandqualityof itsstaffovertime.FSSAat71-72;DARat102.Inaddition,ChineseauthoritiesnotedthesignificantimprovementsChinahasmadeinsupervisionaswellastherelativesimplicityoftheChinesebankingsystem.FSSAat 72;DARat102-3.DespitethedifferenceinviewsaboutthedegreetowhichChinesebanks’riskmanagementis commensuratewiththecurrentriskenvironment,ChineseauthoritiesconcurredwiththeFSSAthat“continuedimprovementsinbanks’riskmanagementareneeded,asfinancialreformdeepensandliberalizationcreates greaterinterconnectednessandcomplexitiesintheChinesesystem.”FSSAat72;DARat103. 39 See58FederalRegister6348,6349(January12,1993).
274 FederalReserveBulletin|December2012 Aspartof theBoard’ssupervisoryprogramforforeignbanks,theBoardactivelymonitors changestothesupervisorysystemsinthehomecountriesof foreignbanks,aswellasdifferencesthatmayexistinthesupervisoryframeworkasitisappliedbyahomecountryto institutionsof differenttypesorsizes,andwouldcontinuetodosowithrespecttoChina. TheBoardalsointendstofurtheritsrelationshipwithChinesesupervisoryauthoritiesand continuetodevelopitsunderstandingof Chinesebankingmatters. CICandHuijin:Inconnectionwithapriorapplication,theBoarddeterminedthatCIC wassubjecttoanappropriatetypeandlevelof CCSbyitshomecountryauthorities,given itsuniquenatureandstructure.40Therehavebeennomaterialchangesinthemannerin whichCICissupervisedorregulatedbyitshomecountryauthoritiessincetheprevious determination.Basedonthisandallthefactsof record,theBoardhasdeterminedthat CICcontinuestobesubjecttoCCS. TheBoardhasnotmadeaCCSdeterminationwithrespecttoHuijin.IntheCICOrder, theBoardnotedthatthesystemof comprehensivesupervisionorregulationmayvary, dependingonthenatureof theacquiringcompanyandtheproposedinvestment.41The Boardbelievesthat,likeCIC,Huijinissubjecttoanappropriatetypeandlevelof comprehensiveregulationonaconsolidatedbasis,givenitsuniquenatureandstructure. HuijinisajointstockcompanyestablishedtoinvestinChinesefinancialinstitutionsandis whollyownedbythegovernmentof ChinathroughCIC.42Huijin’sarticlesof association donotpermitittoconductanyothercommercialactivitiesorinterfereintheday-to-day businessof thefinancialinstitutionsitcontrols.Huijinisgovernedbyafive-memberboard of directorsandathree-memberboardof supervisors.AsisthecasewithCIC,themembersareappointedbytheStateCouncil. Oversightof theoperationsof CICandHuijinbytheStateCouncilandotheragenciesof theChinesegovernmentallowsforreviewof theworldwideinvestmentstrategyandportfolioof CICandof Huijin’sroleasamajorshareholderof Chinesefinancialinstitutions.On thisbasis,appropriateauthoritiesinChinawouldappeartohavefullaccesstoandoversightof Huijinanditsactivities. TheBoardalsohastakenintoaccountthatCICandHuijinarenotoperatingentitiesand thatCIC’sandHuijin’sproposedinvestmentinBEA-USAwouldbeindirectandthrougha substantialforeignbanksupervisedandregulatedbytheCBRC.CICandHuijinhaverepresentedthattheydonotdirectlyengageinthebusinessof bankinganddonotintervenein theday-to-daybusinessoperationsof theChinesefinancialinstitutionsinwhichHuijin invests.CICandHuijinhavefurtherrepresentedthattheywerenotinvolvedinthedecision byICBCtoenterintotheproposedacquisitionof BEA-USAorinthenegotiationof the termsof theinvestment,andtheyconductednoadditionalduediligenceonBEA-USA. Basedonallthefactsof record,theBoardhasdeterminedthatHuijinissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitsappropriatehomecountryauthoritiesfor purposesof thisapplication. EffortstoEnsureAgainstMoneyLaundering:Thegovernmentof Chinahasadopteda statutoryregimeregardinganti-moneylaundering(“AML”)andsuspiciousactivityreportingandhascriminalizedmoney-launderingactivitiesandotherfinancialcrimes.The 40 CICOrder. 41 Id.atB33. 42 BothCICandHuijinhavestatedthatthereisastrictfirewallbetweenthetwocompaniesregardingtheirinvestmentactivities.
LegalDevelopments:SecondQuarter,2012 275 PBOCsupervisesandexaminesChinesebankswithrespecttoAMLandcoordinates effortsamongotheragencies.43ThePBOCcollects,monitors,analyzes,anddisseminates suspicioustransactionreportsandlarge-valuetransactionreports. ThePBOCovertimehasincreasedrequirementsforitssupervisedinstitutionsregarding AMLcompliance.ThePBOCissuedrulesprovidingclarificationof,orfurtherstrengtheningtheimplementationof,operatingprocedures,customerduediligenceandriskclassification,recordkeeping,AMLmonitoringandreportingsuspicioustransactions,andtheinternationalremittanceagencybusiness.ThePBOCalsorequiresthedesignationof achief AMLcomplianceofficerasahigh-levelmanagertoensureprovisionof adequateAML resourcesandtimelyflowof informationtoemployeesresponsibleforAMLcompliance throughouttheinstitution.Inaddition,thePBOCrequirestheriskratingof customersand thefilingof reportsonsuspiciousactivityandcertainothertransactions.Banksare requiredto(1)establishacustomeridentificationsystem,inaccordancewithapplicable rulesjointlypromulgatedbythePBOCandthreefunctionalfinancialservicesregulators;44 (2)recordtheidentitiesof customersandinformationrelatingtoeachtransaction;and (3)retainretailtransactiondocumentsandbooks.Supervisedinstitutionshavebeen encouragedtomovebeyondaprescriptive-criteriabasistoincludeamoreexpansiveand risk-basedapproachtosuspiciousactivitydetectionandreporting. Chinaparticipatesininternationalforathataddressthepreventionof moneylaundering andterroristfinancing.Chinabecameamemberof theFinancialActionTaskForce (“FATF”)inJune2007.Chinaalsoisamemberof theEurasianGroup(“EAG”),aFATFstyleregionalbodythatsupportsmembercountriesintheireffortstocreateandmaintain anappropriatelegalandinstitutionalframeworktocombatmoneylaunderingandterrorist financinginlinewithFATFstandards.45EAGevaluatesitsmemberstates’AMLand counter-terrorist-financing(“CFT”)systemsforcompliancewithinternationalstandards.46 Inthemostrecentmutualevaluationreportof China,datedFebruary17,2012,theFATF consideredChinatobefullyorlargelycompliantwithalmostallof theFATFrecommendationsandheldthatChinahaseffectiveAMLandCFTsystemsinforce.Asaresult,the FATFhasremovedChinafromitsregularfollow-upprocess.47 43 Asnotedabove,HuijinandCICareinvestmentvehiclesthatmakeinvestmentsincompaniesanddebtsecurities andaredirectlyoverseenbyavarietyofgovernmentagenciesinChina,includingtheNationalAuditOffice andtheStateCouncil. 44 ThoseregulatorsaretheCBRC,CSRC,andCIRC. 45 Chinaalsoisapartytootheragreementsthataddressmoneylaunderingorterroristfinancing,includingthe U.N.ConventionAgainsttheIllicitTrafficofNarcoticsandPsychotropicSubstances,theU.N.Convention AgainstTransnationalOrganizedCrime,theU.N.ConventionAgainstCorruption,andtheU.N.International ConventionfortheSuppressionoftheFinancingofTerrorism. 46 AcommenterallegedthatChineseauthoritieshavefailedinthepasttosuperviseChinesebanksoperatingin MacauSARwithrespecttoAMLmattersandreferredtosanctionsimposedonaMacaubankbytheU.S. DepartmentoftheTreasuryin2007.Thecommenteralsoallegesthatmoney-launderingrisksexistinChina becausethefollow-upreportstothemutualevaluationofChina’sprogressinimplementingrecommendations oftheFATF,undertakenbytheEAG,ratedChinatobenon-compliantorpartiallycompliantoncertain FATFrecommendations.Onthisbasis,thecommenterrequeststhattheBoarddelayanyactionontheseapplicationsuntilChinaisinfullcompliancewithallrecommendationsoftheFATF.Thiscommentwassubmitted beforetheissuanceofthemostrecentevaluationreportonChina,whichfoundChinatobelargelycompliant withFATF’sAMLrequirements. 47 FATF,ChinaMutualEvaluation8thFollow-upReport,Anti-MoneyLaunderingandCombatingtheFinancingofTerrorism(February17,2012),availableatwww.fatfgafi.org/dataoecd/5/34/49847246.pdf.Thereport notedthatChinahasmadesignificantprogresstoaddresstheremainingdeficienciesandhas“reachedasatisfactorylevelofcompliancewithallsixcoreRecommendationsandeightofthe[ten]keyRecommendations.” Idatpara.41.InoneofthekeyRecommendationswhereChinahasnotattainedasatisfactorylevelofcompliance(implementationofinternationalinstrumentsrelatedtoterroristfinancing),Chinahassubstantially addressedpartofthedeficiencyandcontinuestomakeprogress.WithrespecttotheotherkeyRecommendation(freezingofterrorist-relatedassets),ChinahasmadesignificantprogresssinceJune2011toimproveits implementation.Inparticular,Chinahasimplementedlegislationestablishingalegislativeframeworkand
276 FederalReserveBulletin|December2012 Moreover,theChinesegovernmentissuesrulesonimplementingUnitedNationssanctions andmaytakeenforcementactionstoensurecompliancewiththosesanctions.ThePBOCis alsoresponsiblefordisseminatinginformationtothebankingindustryregardingU.N. sanctionsandsupervisingtheenforcementof thosesanctions. ThePBOCsupervisesandregulatescompliancebyICBCwithAMLrequirementsthrough acombinationof on-siteexaminationsandoff-sitemonitoring.Onsiteexaminationsfocus onICBC’scompliancewithAMLlawsandrules.ThePBOC’sheadquartersconducts investigationsof afinancialinstitution’sheadoffice,andthePBOC’sbranchesconduct investigationsof theinstitution’sbranchofficesinthesamelocalityasthePBOCbranches. Duringthecourseof anon-siteexamination,thePBOCwillgenerallyreviewaccount information,transactionrecords,andanyotherrelevantmaterials.Uponcompletionof an investigation,if AMLdeficienciesareidentified,thePBOCmayissuesanctionsandproposethatremedialmeasuresbeimposedbyappropriategovernmentagenciesorregulators againstthefinancialinstitutionandcanreferanysuspectedmoneylaunderingtolaw enforcementauthoritiesforfurtherinvestigation.ThePBOCperformsoff sitemonitoring throughperiodicreportsandhasestablishedrequirementsforChinesebankstosubmit suchreports.Inordertoimproveoff-sitesupervisionandmonitoringof large-amountcash transactions,thePBOCdevelopedaninteractiveinformationtechnologysystemforAML/ CFTsupervisionthathasbeeninoperationsinceOctober2010inboththePBOCand financialinstitutions. ICBChaspoliciesandprocedurestocomplywithChineselawsandrulesregardingAML. ICBCstatesthatithasimplementedmeasuresconsistentwiththeinstitution-specificrecommendationsof theFATFandthatithasputinplacepolicies,procedures,andcontrols toensureongoingcompliancewithallstatutoryandregulatoryrequirements,including designatingAMLcompliancepersonnelandconductingroutineemployeetrainingatall ICBCbranches.ICBC’scompliancewithAMLrequirementsismonitoredbythePBOC andbyICBC’sinternalandexternalauditors.Onconsummation,BEA-USA’soperations willbeintegratedintoICBC’sglobalregulatorycompliancesystem,whichincludescompliancewithU.S.law. Basedonallthefactsof record,theBoardhasdeterminedthattheAMLeffortsbyApplicantsandtheirhomecountrysupervisorsareconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardalsomustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).48TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccount arelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbank expansionaryproposals.49 administrativeauthorityforenforcementandithasrespondedtoforeignrequeststofreezeassets.TheFATF wasoftheviewthatChinashouldenactadditionalguidancetoimproveimplementation,andChineseauthoritiesarecurrentlydraftingrulestodoso.Id.atparas.150-52and157-59. 48 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 49 12U.S.C.§2903.
LegalDevelopments:SecondQuarter,2012 277 TheBoardhasconsideredallthefactsof record,includingevaluationsof theCRAperformancerecordof BEA-USA,datareportedbyBEA-USAundertheHomeMortgageDisclosureAct(“HMDA”),50aswellasotherinformationprovidedbyICBC,confidential supervisoryinformation,andpubliccommentsreceivedontheproposal.SeveralcommentersrequestedthattheBoardbarICBCfromexpandingBEA-USA’sexistingbranchnetworkforathree-tofive-yearperiodandrequireICBCtodevelopacomprehensiveCRA plantoensurethatBEA-USAeffectivelyservesallminorityandunderservedcommunities. SeveralcommentersalsorequestedthattheBoardrequireICBCtosubmitaCRAplanor enterintocommitmentsthatwillensureBEA-USAprovidesservicetoallunderservedand minoritycommunitiesinitsserviceareas.51Inaddition,severalcommentersraisedconcernsthatBEA-USAmightexcludeAfricanAmericans,Hispanics,andSoutheastAsians intheprovisionof itsproductsandservices.OthercommentersallegedthatBEA-USA excludesAfricanAmericansandHispanicswithrespecttoitshomemortgagelending. A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasconsideredtheconvenienceandneedsfactorin lightof theevaluationsbytheappropriatefederalsupervisorsof theCRAperformance recordof therelevantinsureddepositoryinstitutions,includingBEA-USA.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.52 Aspreviouslynoted,CICandHuijincontrolBankof ChinaLimited,whichhastwo grandfatheredfederalbrancheswhosedepositsareinsuredbytheFDIC.Thebranches receiveda“satisfactory”ratingattheirmostrecentCRAperformanceevaluationbythe FDIC,asof August18,2008.53BEA-USAreceivedan“outstanding”ratingatitsmost recentCRAperformanceevaluationbytheOCC,asof January4,2010.54BEA-USA receivedan“outstanding”ratingundereachof thelendingandcommunitydevelopment tests.55Examinersnotedthatasubstantialmajorityof BEA-USA’sloanswereoriginatedin itsassessmentareas,thatthedistributionof itsloansreflectsexcellentpenetrationamong businessesof differentsizesintheassessmentareas,andthatthegeographicdistributionof loansreflectsexcellentdispersionthroughouttheassessmentareas.Examinersalso reportedthatBEA-USA’scommunitydevelopmentperformancedemonstratesexcellent responsivenesstotheneedsof theassessmentareasthroughloans,investments,and services.56ICBChasrepresentedthatitinitiallyintendstomaintainBEA-USA’sexisting businessandwillbepreparedtoexpandofferingsforBEA-USA’scustomersinthefuture. 50 12U.S.C.§§2801-2810. 51 TheBoardconsistentlyhasstatedthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization andthattheenforceabilityofanysuchthird-partypledges,initiatives,andagreementsaremattersoutsidethe CRA.SeeBankofAmericaCorporation,90FederalReserveBulletin217,232-33(2004). 52 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 53 ICBC’suninsuredbranchandtheuninsuredbranchesofotherChinesebankscontrolledbyCICandHuijin arenotsubjecttotheCRA. 54 TheevaluationperiodwasJanuary1,2006,toJanuary4,2010. 55 BEA-USAwasevaluatedundertheintermediatesmallbankperformancecriteria,whichonlyincludealending testandacommunitydevelopmenttest. 56 Forexample,intheNewYorkassessmentarea,BEA-USAmade15communitydevelopmentloanstotaling $18.6million,including5loansforaffordablehousing,and22qualifiedinvestmentstotalingapproximately $2.6million,whichconsistedof$2.5millioninFannieMaeinvestmentsand$100,000incharitabledonations. BEA-USA’sstaffalsoprovidedcommunitydevelopmentservicesduringthereviewperiod,includingfinancial literacyandhomeownershipseminars.
278 FederalReserveBulletin|December2012 B.HMDAandCompliancewithFairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtheHMDAdatafor2009,2010,and2011reportedbyBEA- USAinitscombinedassessmentareasandthefairlendingrecordof BEA-USAinlightof publiccommentsreceivedontheproposal.57Severalcommentersalleged,basedonHMDA datareportedin2009,thatBEA-USAhadengagedindisparatetreatmentof minorityindividualsinitsone-tofour-familyhomemortgagelending.Specifically,thecommenters assertedthatBEA-USAexcludesAfricanAmericansandHispanicsinhomepurchaseand refinancelendingandthatitdiscriminatesagainstAsianAmericanswithincomesbelow 100percentof themedianincomeof themetropolitanstatisticalareainitsrefinance lending. BEA-USAispredominantlyacommerciallenderandmakesalimitednumberof one-to four-familymortgageloans.Itsone-tofour-familymortgagelendinglargelyresultsfrom walk-intrafficatthebank’sbranches,mostof whichareinAsianAmericanneighborhoods.Throughoutitscombinedassessmentareas,BEA-USAmade32one-tofourfamily mortgageloansin2009,26in2010,and20in2011.Duringthatsametimeperiod,BEA- USAreceivedonlyoneapplicationforaone-tofour-familymortgageloanfromanAfricanAmericanandfourapplicationsfromHispanics.TheHMDAdataalsoindicatethat BEA-USAmadeamaterialpercentageof itsone-tofour-familymortgageloanstoLMI borrowers(thosewithincomesof lessthan80percentof theareamedianincome)inthe bank’sassessmentareas.Between2009and2011,21percentof BEA-USA’smortgagerefinanceloansand35percentof BEA-USA’sconventionalhomepurchaseloansweremade toLMIborrowers.58 AlthoughtheHMDAdatamightreflectcertaindisparitiesintheratesof loanapplications, originations,denials,orpricingamongmembersof differentracialorethnicgroupsincertainlocalareas,theyprovideaninsufficientbasisbythemselvesonwhichtoconclude whetherornotBEA-USAisexcludingorimposinghighercostsonanyracialorethnic grouponaprohibitedbasis.TheBoardrecognizesthatHMDAdataalone,evenwiththe recentadditionof pricinginformation,provideonlylimitedinformationaboutthecovered loans.59HMDAdata,therefore,havelimitationsthatmakethemaninadequatebasis, absentotherinformation,forconcludingthataninstitutionhasengagedinillegallending discrimination. TheBoardisneverthelessconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheir lendingpracticesarebasedoncriteriathatensurenotonlysafeandsoundlendingbutalso equalaccesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Moreover,theBoardbelievesthatallbankholdingcompaniesandtheiraffiliatesshouldconduct mortgagelendingoperationsthatarefreeof abusivelendingpracticesandincompliance withallconsumerprotectionlaws. 57 BEA-USA’scombinedCRAassessmentareasconsistofKings,Manhattan,andQueensCounties,whicharein theNewYork-NewJersey-LongIsland,NY-NJ-PAMetropolitanStatisticalArea;theentireSanFrancisco-San Mateo-RedwoodCity,CaliforniaMetropolitanDivisionandtheAlamedaCountyportionoftheOakland- Fremont-Hayward,CAMetropolitanDivision,bothofwhicharepartofthegreaterSanFrancisco-Oakland- Fremont,CaliforniaMetropolitanStatisticalArea;andtheentireLosAngeles-LongBeach-GlendaleMetropolitanDivision. 58 Morethanone-halfofBEA-USA’sbranchesareinlow-tomoderate-incomecommunities. 59 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicationsthanotherinstitutionsattractanddonotprovideforan independentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.Inaddition, credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueof therealestatecollateral(reasonsmostfrequentlycitedforacreditdenialorhighercostcredit)arenotavailable fromHMDAdata.
LegalDevelopments:SecondQuarter,2012 279 Becauseof thelimitationsof HMDAdata,theBoardhasconsideredthesedataandtaken intoaccountotherinformation,includingexaminationreportsthatprovideevaluationsof compliancebyBEA-USAwithconsumerprotectionlaws.TheBoardalsohasconsulted withtheOCC,BEA-USA’sprimaryfederalsupervisor. Therecordof thisapplication,includingconfidentialsupervisoryinformation,indicates thatBEA-USAhastakenstepstoensurecompliancewithfairlendingandotherconsumer protectionlawsandregulations.InBEA-USA’smostrecentCRAPerformanceEvaluation, examinersnoted“noevidenceof discriminatoryorotherillegalcreditpractices....”60In addition,BEA-USA’sloanpoliciesincludeinformationonprohibiteddiscriminatorylendingpractices.BEA-USA’sadvertisingandmarketingpolicycontainsspecificguidanceon practicesthatemployeesshouldavoidthatwouldtendtodiscourageloanapplicantsona prohibitedbasis.Additionally,thebank’semployeesinvolvedinlendingarerequiredto participateinannualtrainingthatincludescompliancewithfairlendinglawsand otherapplicablelawsandregulations.Moreover,ICBChasstateditintendstoconducta fullreviewof BEA-USA’srisk-managementprogramforfairlendingcomplianceafterconsummationof theproposal. C.ConclusiononConvenienceandNeedsandCRAPerformance TheBoardhasconsideredallthefactsof record,includingevaluationsof theCRAperformancerecordof BEA-USAandotherrelevantinsureddepositoryinstitutions,information providedbyICBCandBEA-USA,commentsreceivedontheproposal,andconfidential supervisoryinformation.Basedonareviewof theentirerecord,theBoardconcludesthat considerationsrelatingtotheconvenienceandneedsfactorandtheCRAperformance recordsof therelevantinsureddepositoryinstitutionsareconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionActamendedsection3of theBHCActtorequiretheBoardalsotoconsider“theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”61 FinancialStabilityStandard Inreviewingapplicationsandnoticesundersections3and4of theBHCAct,theBoard expectsthatitwillgenerallyfindasignificantadverseeffectif thefailureof theresulting firm,oritsinabilitytoconductregular-course-of-businesstransactions,wouldlikelyimpair financialintermediationorfinancialmarketfunctioningsoastoinflictmaterialdamageon thebroadereconomy.Thiskindof damagecouldoccurinanumberof ways,including seriouslycompromisingtheabilityof otherfinancialinstitutionstoconductregularcourseof-businesstransactionsorseriouslydisruptingtheprovisionof creditorotherfinancial services. Ontheotherhand,certaintypesof transactionslikelywouldhaveonlyademinimisimpact onaninstitution’ssystemicfootprintand,therefore,arenotlikelytoraiseconcernsabout financialstability.Forexample,aproposalthatinvolvesanacquisitionof lessthan 60 TheBankofEastAsia,USA,NationalAssociationCommunityReinvestmentActPerformanceEvaluation, January4,2010,at5.Moreover,theCRAPerformanceEvaluationnotedthatBEA-USA’sassessmentareasdo notarbitrarilyexcludeLMIareas.Id.at4. 61 Section604(d)oftheDodd-FrankWallStreetReformandConsumerProtectionAct,Pub.L.No.111-203,124 Stat.1376,codifiedat12U.S.C.§1842(c)(7).
280 FederalReserveBulletin|December2012 $2billioninassets,resultsinafirmwithlessthan$25billionintotalassets,orrepresentsa corporatereorganizationmaybepresumednottoraisefinancialstabilityconcernsabsent evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness, complexity,cross-borderactivities,orotherriskfactor. Analysisof theFinancialStabilityImpactof thisProposal Inthiscase,theproposalwouldhaveademinimisimpactonApplicants’systemicfootprint becauseBEA-USAhasconsolidatedassetsof approximately$780million.Theacquisition of BEA-USAwouldnotmeaningfullyincreaseICBC’ssize.Theproposalalsowouldnot addanysignificantcomplexitytotheoveralloperationsof ICBCasBEAUSAisatraditionalcommercialbankthatfocuseslargelyoncommerciallending.Asnotedabove,ICBC operatessubsidiarybanksworldwide,includingintheUnitedKingdomandCanada.While BEA-USAwouldaddtoICBC’scross-borderactivities,BEA-USAoperatesonlyinthe UnitedStatesandICBCalreadyengagesinbankingandfinancialservicesintheUnited StatesthroughitsNewYorkbranch,whichhasassetsof $1.5billion,anditssubsidiary U.S.broker-dealer.62Moreover,neitherICBCnorBEA-USAisamajorproviderof any productorservicethattheBoardbelieveshasthepotentialtobecriticaltothefunctioning of theU.S.financialsystem.Finally,theextentof BEA-USA’sinterconnectednesswiththe U.S.financialsystemanditscontributiontothecomplexityof theU.S.financialsystemare bothsufficientlysmalltobeconsidereddeminimis. Basedontheseandalltheotherfactsof record,theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasapprovedtheapplication byApplicantstoacquireupto80percentof thevotingsharesof BEA-USApursuantto section3(a)(1)of theBHCAct.Inreachingitsconclusion,theBoardhasconsideredallthe factsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCActand otherapplicablestatutes.63TheBoardconditionsitsdecisiononApplicantsprovidingto theBoardadequateinformationontheiroperationsandactivitiesaswellasthoseof their affiliatestodetermineandenforcecompliancebyApplicantsortheiraffiliateswithapplicablefederalstatutes.Shouldanyrestrictionsonaccesstoinformationontheoperationsor activitiesof Applicantsoranyof theiraffiliatessubsequentlyinterferewiththeBoard’s abilitytoobtaininformationtodetermineandenforcecompliancebyApplicantsortheir affiliateswithapplicablefederalstatutes,theBoardmayrequireterminationordivestiture of anyof Applicants’ortheiraffiliates’directorindirectactivitiesintheUnitedStates. TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswiththeconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwith theapplication.64Forpurposesof thisaction,theconditionsandcommitmentsaredeemed 62 ICBChasnotbeendesignatedaglobalsystemicallyimportantbankbytheBaselCommitteeonBanking Supervision. 63 CommentersalsorequestedthattheBoardextendthecommentperiodontheproposal.TheBoardalready extendedthecommentperiodwithrespecttocertainmattersfortendays,allowingthecommentersmorethan thirty-sixdaystosubmitcomments.IntheBoard’sview,thecommentershavehadampleopportunitytosubmittheirviewsand,infact,haveprovidedwrittensubmissionsthattheBoardhasconsideredinactingonthe proposal.Basedonareviewofallthefactsofrecord,theBoardhasconcludedthattherecordinthiscaseis sufficienttowarrantactionatthistimeandthatfurtherdelayinconsideringtheproposal,extensionofthe commentperiod,ordenialoftheproposalonthegroundsdiscussedabove,isnotwarranted. 64 CommentersrequestedthattheBoardholdapublicmeetingorhearingontheproposal.Section3(b)ofthe BHCActdoesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervi-
LegalDevelopments:SecondQuarter,2012 281 tobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw.65 Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof New York,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMay9,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Orders Issued Under International Banking Act Agricultural Bank of China Limited Beijing, People’s Republic of China OrderApprovingEstablishmentof aBranch FRBOrderNo.2012–5(May9,2012) AgriculturalBankof ChinaLimited(“ABC”),Beijing,People’sRepublicof China,aforeignbankwithinthemeaningof theInternationalBankingAct(“IBA”),hasappliedunder section7(d)of theIBA1toestablishastate-licensedbranchinNewYork,NewYork.The ForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,provides thataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchinthe UnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(TheNew YorkPost,October4,2010).Thetimeforfilingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. soryauthorityforthebanktobeacquiredmakesatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromthoseauthorities.Underitsrules, theBoardalsomay,initsdiscretion,holdapublicmeetingorhearingonanapplicationtoacquireabankif necessaryorappropriatetoclarifymaterialfactualissuesrelatedtotheapplicationandtoprovideanopportunityfortestimony.12CFR225.16(e),262.25(d).TheBoardhasconsideredthecommenters’requestsinlightof allthefactsofrecord.IntheBoard’sview,thecommentershadampleopportunitytosubmittheirviewsand, infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’ requestsfailtodemonstratewhywrittencommentsdonotpresenttheirviewsadequatelyorwhyameetingor hearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord, theBoardhasdeterminedthatapublicmeetingorhearingisnotrequiredorwarrantedinthiscase. Accordingly,therequestsforapublicmeetingorhearingontheproposalaredenied. 65 Commentersassertedthattheproposalwouldraisenationalsecurityconcerns.TheBoardnotesthatCongress hasprovidedotherU.S.agenciestheauthoritytoreviewnationalsecurityissuesinproposalsbyforeigncompaniestoacquireU.S.companies.CommentersraisedadditionalconcernsthataddressmattersbeyondthestatutoryfactorstheBoardisauthorizedtoconsider.SeeWesternBancshares,Inc.v.BoardofGovernors,480F.2d 749(10thCir.1973). 1 12U.S.C.§3105(d).
282 FederalReserveBulletin|December2012 ABC,withtotalassetsof approximately$1.85trillion,isthefourthlargestbankinChina.2 Thegovernmentof Chinaownsapproximately83percentof ABC’sshares.3Noother shareholderownsmorethan5percentof thesharesof ABC. ABCengagesprimarilyinretailandcommercialbankingthroughoutChina,including HongKongSARandMacauSAR.OutsideChina,ABCoperatesasubsidiaryinthe UnitedKingdom,branchesinSingaporeandKorea,andrepresentativeofficesinJapan, Germany,andAustralia.IntheUnitedStates,ABCoperatesarepresentativeofficeinNew YorkCity.ABCisaqualifyingforeignbankingorganizationunderRegulationK.4 TheproposedNewYorkbranchwouldengageinwholesaledeposittaking,lending,trade finance,andotherbankingservices. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates;(2)hasfurnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately;and(3)issubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.5Inassessingthecomprehensive,consolidatedsupervisionstandard,theBoardhasconsideredtheBaselCore 2 AssetandrankingdataareasofDecember31,2011. 3 TheMinistryofFinanceownsapproximately39percent,andTheNationalCouncilforSocialSecurityFund ownsapproximately3.9percentofABC’sshares.CentralHuijinInvestmentLtd.(“Huijin”)ownsapproximately40percentofABC’sshares.HuijinwasformedtoassistintherestructuringofmajorChinesebanks. ThegovernmenttransferredsharesofseveralChinesebanks,includingABC,toHuijinatthetimeofthe recapitalizationandrestructuringofthesebanksbetween2004and2006.Huijinalsoownsamajorityinterest inChinaConstructionBankCorporation(“CCB”)andBankofChinaLimited(“BOC”),andtogetherwith theMinistryofFinance,itownsamajorityinterestinIndustrialandCommercialBankofChinaLimited (“ICBC”),allofBeijing.CCBandICBCeachoperateabranchinNewYorkCity,andBOCoperatesbranches inNewYorkCityandLosAngeles.ThegovernmentofChinatransferredtheownershipofHuijintoChina InvestmentCorporation(“CIC”),aninvestmentfundthatisalsowhollyownedbythegovernmentofChina. CICowns9.9percentofthesharesofMorganStanley,NewYork,NewYork,abankholdingcompanythat ownsabankinUtahandabankinNewYork.BothCICandHuijinarenon-operatingcompaniesthathold investmentsonbehalfofthegovernmentofChina.NeitherCICnorHuijinengagesdirectlyincommercialor financialactivities. UndertheIBA,anycompanythatownsaforeignbankwithabranchintheUnitedStatesissubjecttothe BankHoldingCompanyAct(“BHCAct”)asifitwereabankholdingcompany.Becauseoftheirownershipof CCB,BOC,andICBC,CICandHuijinaresubjecttotheBHCAct.TheBoardhasprovidedcertainexemptionstoCICandHuijinundersection4(c)(9)oftheBHCAct(12U.S.C.§1843(c)(9)),whichauthorizesthe BoardtograntexemptionstoforeigncompaniesfromthenonbankingrestrictionsoftheBHCActwhenthe exemptionswouldnotbesubstantiallyatvariancewiththepurposesoftheactandwouldbeinthepublicinterest.TheexemptionsprovidedtoCICandHuijinwouldnotextendtoABCoranyotherbankingsubsidiaryof CICorHuijinthatoperatesabranchoragencyintheUnitedStates.SeeBoardlettertoH.RodginCohen, Esq.,datedAugust5,2008. 4 12CFR211.23(a). 5 12U.S.C.§3105(d)(2);12CFR211.24.RegulationKprovidesthataforeignbankissubjecttoconsolidated homecountrysupervisioniftheforeignbankissupervisedorregulatedinsuchamannerthatitshomecountry supervisorreceivessufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanyaffiliate)toassesstheforeignbank’soverallfinancialconditionandcompliance withlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthisstandard,theBoardconsiders,amongother indiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors: (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetween thebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandrisk assetexposure,onaworldwidebasis.Nosinglefactorisdeterminative,andotherelementsmayinformthe Board’sdetermination.TheBoardhaslongheldthat“thelegalsystemsforsupervisionandregulationvary fromcountrytocountry,andcomprehensivesupervisionorregulationonaconsolidatedbasiscanbeachieved indifferentways.”57FederalRegister12992,12995(April15,1992).
LegalDevelopments:SecondQuarter,2012 283 PrinciplesforEffectiveBankingSupervision(“BaselCorePrinciples”),6whicharerecognizedastheinternationalstandardforassessingthequalityof banksupervisorysystems, includingwithrespecttocomprehensive,consolidatedsupervision.7TheBoardalsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.8 Asnotedabove,ABCengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. ABCalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. Foranumberof years,authoritiesinChinahavecontinuedtoenhancethestandardsof consolidatedsupervisiontowhichbanksinChinaaresubject,includingthroughadditional orrefinedstatutoryauthority,regulations,andguidance;adoptionof internationalstandardsandbestpractices;enhancementstothesupervisorysystemarisingoutof supervisoryexperiences;upgradestotheChinaBankingRegulatoryCommission(“CBRC”),the agencywithprimaryresponsibilityforthesupervisionandregulationof Chinesebanking organizations,intheareasof organization,technologicalcapacity,staffing,andtraining; andincreasedcoordinationbetweentheCBRCandotherfinancialsupervisoryauthorities inChina.9 TheBoardhasreviewedtherecordinthiscaseandhasdeterminedthattheenhancements tostandardsof banksupervisioninChinawithrespecttoABCwarrantafindingthat ABCissubjecttocomprehensive,consolidatedsupervisionbyitshomecountrysupervisors.Inmakingthisdetermination,theBoardhasconsideredthattheCBRCistheprincipalsupervisoryauthorityof ABC,includingitsforeignsubsidiariesandaffiliates,forall mattersotherthanmoneylaundering.10TheCBRChasprimaryresponsibilityandauthorityforregulatingtheestablishmentandactivitiesandtheexpansionanddissolutionof bankinginstitutions,bothdomesticallyinChinaandabroad.TheCBRChasnoobjection toABC’sestablishmentof theproposedbranch.TheCBRCmonitorsChinesebanks’con- 6 SeeBankforInternationalSettlements,BaselCommitteeonBankingSupervision,CorePrinciplesforEffective BankingSupervision(October2006),availableatwww.bis.org/publ/bcbs129.pdf. 7 Seee.g.,93rdAnnualReportoftheBoardofGovernorsoftheFederalReserveSystem(2006),at76(“The CorePrinciples,developedbytheBaselCommitteein1997,havebecomethedefactointernationalstandard forsoundprudentialregulationandsupervisionofbanks.”). 8 12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2)-(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;thefinancialandmanagerialresourcesofthebank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountrytoaddress moneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankhasprovidedtheBoardwithadequateassurancesthatitwillmake availabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofitsaffiliatesthattheBoard deemsnecessarytodetermineandenforcecompliancewiththeIBAandotherapplicablefederalbankingstatutes;whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthecommunity;the bank’srecordofoperation.TheBoardalsoconsiders,inthecaseofaforeignbankthatpresentsarisktothe stabilityoftheUnitedStates,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuch homecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 9 TheBoardhaspreviouslyapprovedapplicationsfromChinesebankstoestablishU.S.branchesunderalower standardthanthecomprehensive,consolidatedsupervisionstandard.SeeChinaMerchantsBankCo.,Limited, 94FederalReserveBulletinC24(2008);IndustrialandCommercialBankofChinaLimited,94FederalReserve BulletinC114(2008);ChinaConstructionBankCorporation,95FederalReserveBulletinB54(2009);andBank ofCommunicationsCo.Ltd.,(orderdatedApril8,2011),97FederalReserveBulletin49(2ndQuar.2011).In eachcase,theBoardmadeadeterminationthatthebank’shomecountrysupervisorswereactivelyworkingto establisharrangementsfortheconsolidatedsupervisionofthebank.12U.S.C.§3105(d)(6). 10 BeforeApril2003,thePeople’sBankofChina(“PBOC”)actedasbothChina’scentralbankandprimary bankingsupervisor,includingwithrespecttoanti-money-launderingmatters.InApril2003,theCBRCwas establishedastheprimarybankingsupervisorandassumedthemajorityofthePBOC’sbankregulatoryfunctions.ThePBOCmaintaineditsrolesasChina’scentralbankandprimarysupervisorforanti-money-launderingmatters.
284 FederalReserveBulletin|December2012 solidatedfinancialcondition,compliancewithlawsandregulations,andinternalcontrols throughacombinationof on-siteexaminations,off-sitesurveillancethroughthereviewof requiredregulatoryreportsandexternalauditreports,andinteractionwithsenior management. Sinceitsestablishmentin2003,theCBRChasaugmenteditssupervisorystructure,staffing,andinternaloperations;enhanceditsexistingsupervisoryprograms;anddeveloped newpoliciesandprocedurestocreateaframeworkfortheconsolidatedsupervisionof the largestbanksinChina.TheCBRCalsohasstrengtheneditssupervisoryregimerelatedto accountingrequirementsandstandardsforloanclassification,internalcontrols,riskmanagement,andcapitaladequacy,andithasdevelopedandimplementedariskfocusedsupervisoryframework. TheCBRChasissuedadditionalguidanceinvarioussupervisoryareas,includingstricter prudentialrequirementsforcapital,loan-lossallowancecoverage,executivecompensation, banks’equityinvestmentsininsurancecompanies,andenhancedrisk-managementrequirementsforoperations,liquidity,derivatives,reputational,andmarketrisk.Theguidanceis designedtomakesupervisionmoreriskfocusedandtostrengthenpracticesconsistentwith theBaselCorePrinciples. TheCBRChasitsheadofficeinBeijingandbranchofficesinotherprovinces.Thehead officesetspolicyanddirectssupervisoryactivitiesforthelargestbanksinChina,including ABC.Althoughsomeday-to-daysupervisoryactivitiesareundertakenbytheCBRC’s branchoffices,theheadofficedirectstheseeffortsandensuresconsistencyof approach throughtrainingprogramsandfrequentcommunicationwiththebranches. TheCBRCheadofficepreparesannualexaminationplansforthelargestChinesebanks, includingABC.Theplansencompassbothon-andoff-siteactivities.ApplicableChinese lawandbankingregulationdonotrequirethaton-siteexaminationsbeconductedatany specifiedinterval.Inpractice,theCBRCperformson-siteexaminationsof itslargestbanks frequently,althoughoff-sitesurveillanceiscontinuous.On-siteexaminationsarescheduled basedontheCBRC’scontinuousoff-sitemonitoringtools,analysisof theinstitution’speriodicfilings,resultsof theinstitution’sinternalstresstesting,andtheinstitution’soverall riskprofileandactivities.On-siteexaminationsbytheCBRCtypicallycover,amongother things,themajorareasof operation:corporategovernanceandseniormanagement responsibilities;capitaladequacy;assetstructureandassetquality(includingstructureand qualityof loans);off-balance-sheetactivities;earnings;liquidity;liabilitystructureand fundingsources;expansionaryplans;internalcontrols(includingaccountingcontroland administrativesystems);legalcompliance;accountingsupervisionandinternalauditing; andanyotherareasdeemednecessarybytheCBRC.ThePBOCexaminesABCforcompliancewithanti-money-launderinglawsandrequirements. ExaminationratingsarebasedontheCAMELSratingmodelandemphasizecredit-risk management,thequalityof thebank’sloanportfolio,internalcontrols,liabilitystructure, capitaladequacy,liquidity,andtheadequacyof reserves.Theareasof emphasisreflectthe factthatthelargestChinesebanks,includingABC,engageintraditionalcommercialbankingandarenotmateriallyengagedincomplexderivativesorotheractivities.Ratingsare derivedfromoff-sitequantitativeandqualitativeanalysisandon-siteriskreviews.Examinationfindingsandareasof concernarediscussedwithseniormanagementof thebank, andcorrectiveactionstakenbythebankaremonitoredbytheCBRC.In2009,theCBRC developedaninformationtechnologysystemtoassistinon-siteexaminationsbyimproving dataanalysisandassistinginregulatoryinformationsharing.
LegalDevelopments:SecondQuarter,2012 285 ChinesebanksarerequiredtoreportkeyregulatoryindicatorstotheCBRCperiodicallyon generalschedules.AllChinesebanksarerequiredtosubmitmonthly,quarterly,semiannual,orannualreportsrelatingtoassetquality,lendingconcentrations,capitaladequacy, earnings,liquidity,affiliatetransactions,off-balance-sheetexposures,internalcontrols,and ownershipandcontrol. BanksmustreporttotheCBRCtheirunconsolidatedcapitaladequacyratiosquarterlyand theirconsolidatedratiossemiannually.China’sbankcapitalrulesarebasedontheBaselI CapitalAccord,whiletakingintoaccountcertainaspectsof theBaselIICapitalAccord.In addition,theCBRC,asamemberof theBaselCommitteeonBankingSupervision,has supportedtheBaselIIICapitalAccordframeworkandimplementationtimeframe.The CBRCcantakeenforcementactionswhencapitalratiosorotherfinancialindicators fallbelowspecifiedlevels.Theseactionsmayincludeissuingsupervisorynotices,requiring thebanktosubmitandimplementanacceptablecapitalreplenishmentplan,restricting assetgrowth,requiringreductionof higherriskassets,restrictingthepurchaseof fixed assets,andrestrictingdividendsandotherformsof distributions.Significantlyundercapitalizedbanksmayberequiredtomakechangesinseniormanagementorrestructuretheir operations. ABC,likeotherlargeChinesebanks,isrequiredtobeauditedannuallybyanexternal accountingfirmthatmeetsthestandardsof Chineseauthorities,includingtheMinistryof Finance,PBOC,andCBRC,andtheauditresultsaresharedwiththeCBRCandPBOC. Thescopeof therequiredauditincludesareviewof ABC’sfinancialstatements,assetquality,capitaladequacy,internalcontrols,andcompliancewithapplicablelaws.Atitsdiscretion,theCBRCmayorderaspecialauditatanytime.Inaddition,inconnectionwithits listingontheShanghaiandHongKongstockexchanges,ABCisalsorequiredtoreport financialstatementsunderbothInternationalFinancialReportingStandards(“IFRS”)and ChineseAccountingStandards(“CAS”).Thesefinancialstatementsareauditedbyan internationalaccountingfirmunderapplicableIFRSauditingstandards.11 ABCconductsinternalauditsof itsdomesticofficesandoperationsonanannualschedule andof itsoverseasbranchesandofficesbiennially.Theinternalauditresultsareshared withtheCBRC,PBOC,andABC’sexternalauditors.Theproposedbranchwouldbesubjecttointernalaudits. Chineselawimposesvariousprudentiallimitationsonbanks,includinglimitsontransactionswithaffiliatesandonlargeexposures.12Related-partytransactionsincludecredit extensions,assettransfers,andtheprovisionof anytypeof services.Chinesebanksare requiredtoadoptappropriatepoliciesandprocedurestomanagerelated-partytransactions,andtheboardof directorsmustappointacommitteetosupervisesuchtransactions 11 CASlargelyconformtoIFRS,suchthattherecurrentlyarenomaterialdifferencesbetweenfinancialstatementsproducedforHongKongreportingrequirementsandChinesereportingrequirements.TheInternational MonetaryFund’s(“IMF”)financialsystemstabilityassessmentreportandtheaccompanyingdetailedassessmentreportofobservancewiththeBaselCorePrinciples,discussedindetailbelow,bothfoundthat“[s]ince 2005,[CAS]havesubstantiallyconvergedwith[IFRS]andInternationalStandardsonAuditing,respectively.” IMF,People’sRepublicofChina,FinancialSystemStabilityAssessmentat57(June24,2011);IMFandWorld Bank,People’sRepublicofChina:DetailedAssessmentReportofObservancewithBaselCorePrinciplesfor EffectiveBankingSupervisionat9(April2012).Inaddition,theWorldBankReportonObservanceof StandardsandCodesdeterminedthatCASandIFRSarebasicallycompatibleandthattheChineseauthorities andtheInternationalAccountingStandardsBoardhaveestablishedacontinuingconvergencemechanism designedtoachievefullconvergencein2012.WorldBank,ReportonObservanceofStandardsandCodes (ROSC)AccountingandAuditing–People’sRepublicofChinaatExecutiveSummaryandat12(October2009), availableatwww.worldbank.org/ifa/rosc_aa_chn.pdf. 12 TheCBRCdefinitionofan“affiliate”ora“relatedparty”ofabankincludessubsidiaries,associates/jointventures,shareholdersholding5percentormoreofthebank’sshares,andkeymanagementpersonnel(and immediaterelatives)andthoseindividuals’otherbusinessaffiliations.
286 FederalReserveBulletin|December2012 andrelationships.Applicablelawsrequireallrelated-partytransactionstobeconductedon anarm’s-lengthbasis. Chinesebankinglawalsoestablishessingle-borrowercreditlimits.Loanstoasingleborrowermaynotexceed10percentof thebank’stotalregulatorycapital,theaggregatelendingtoagroupof relatedcompaniesmaynotexceed15percentof thebank’stotalregulatorycapital,andtheaggregateamountof creditgrantedtoallrelatedpartiesmaynot exceed50percentof thebank’stotalregulatorycapital.Thestatusof related-partytransactionsmustbereportedtotheCBRCquarterly. Inaddition,theCBRChascertainoperationallimitationsforcommercialbanksinChina relatingtomatterssuchasliquidityandforeigncurrencyexposure.In2009,theCBRC issuednewrulesconcerningliquiditymanagementandcorporategovernance.Compliance withtheselimitsismonitoredbytheCBRCthroughperiodicreportsandreviewedduring on-siteexaminations. TheCBRCisauthorizedtorequireanybanktoprovideinformationandtoimposesanctionsforfailuretocomplywithsuchrequests.If theCBRCdeterminesthatabankisnotin compliancewithbankingregulationsandprudentialstandards,itmayimposevarious sanctionsdependingupontheseverityof theviolation.TheCBRCmaysuspendapproval of newproductsornewoffices,suspendpartof thebank’soperations,imposemonetary penalties,andinmoreseriouscases,replacemanagementof thebank.TheCBRCalsohas authoritytoimposeadministrativepenalties,includingwarningsandfinesforviolationsof applicablelawsandrules.Criminalviolationsaretransferredtothejudicialauthoritiesfor investigationandprosecution. ABCissubjecttosupervisionbyseveralotherfinancialregulators,includingtheState AdministrationforForeignExchange,ChinaSecuritiesRegulatoryCommission (“CSRC”),andChinaInsuranceRegulatoryCommission(“CIRC”).Theseagenciesreceive periodicfinancialandoperationsreports,andtheymayconducton-siteexaminationsand imposeadditionalreportingrequirements.Chinesefinancialsupervisorscoordinate supervisionandsharesupervisoryinformationaboutChinesefinancialinstitutionsas appropriate. TheIMFrecentlyconcludedafinancialsystemstabilityassessmentof China(“FSSA”), includinganassessmentof China’scompliancewiththeBaselCorePrinciples.13TheFSSA determinedthatChina’soverallregulatoryandsupervisoryframeworkadherestointernationalstandards.14TheFSSAfoundthat“[t]helaws,rulesandguidancethatCBRCoperatesundergenerallyestablishabenchmarkof prudentialstandardsthatisof highquality andwasdrawnextensivelyfrominternationalstandardsandthe[BaselCorePrinciples] themselves.”15TheFSSAadditionallynotedthat“[c]onsolidatedsupervisionof banksand 13 TheassessmentreflectstheregulatoryandsupervisoryframeworkinplaceasofJune24,2011.IMF,People’s RepublicofChina,FinancialSystemStabilityAssessment(June24,2011),availableatwww.imf.org/external/ pubs/ft/scr/2011/cr11321.pdf.TheFSSAcoversanevaluationofthreecomponents:(1)thesource,probability, andpotentialimpactofthemainriskstomacrofinancialstabilityinthenearterm;(2)thecountry’sfinancial stabilitypolicyframework;and(3)theauthorities’capacitytomanageandresolveafinancialcrisisshouldthe risksmaterialize.TheFSSAisakeyinputtoIMFsurveillance.TheFSSAisaforward-lookingexercise,unlike theBoard’sassessmentofthecomprehensive,consolidatedsupervisionofanapplicant. TheIMFandWorldBankseparatelypublishadetailedassessmentofthecountry’sobservanceoftheBasel CorePrinciplesthatdiscussesthecountry’sadherencetotheBaselCorePrinciplesinmuchgreaterdetail.See IMFandWorldBank,People’sRepublicofChina:DetailedAssessmentReportofObservancewithBaselCore PrinciplesforEffectiveBankingSupervision(April2012)(“DAR”),availableatwww.imf.org/external/pubs/ft/ scr/2012/cr1278.pdf. 14 FSSAat39. 15 Id.at59;DARat12.
LegalDevelopments:SecondQuarter,2012 287 theirdirectsubsidiariesandbranchesonthemainlandoroffshoreisof highquality.”16 WithrespecttotheCBRC,theFSSAfoundasfollows:Allthebanks,auditors,ratings agenciesandothermarketparticipantsthatthemissioninteractedwithwereunhesitating intheirregardfortherolethattheCBRChasplayedindrivingprofessionalism,riskmanagementandinternationalrecognitionof theChinesebankingsystem.Inparticular,the missionobservedthat[theCBRC]hasbeenthekeydrivingforceindrivingimprovements inriskmanagement,corporategovernanceandinternalcontrolanddisclosureinChinese banks.17Basedonitsreview,theFSSAratedChina’soverallcompliancewiththeBasel CorePrinciplesassatisfactory.Ingivingthisoverallrating,theFSSAnotedseveralareas thatmeritedimprovementandmadespecificrecommendationsforcontinuedadvancesin supervisionandregulation.18TheChineseauthoritiesnotedthatsomeof therecommendationsof theFSSAarealreadybeingimplementedandthatotherswillbetakeninto accountintheCBRC’splanstoimprovesupervisoryeffectiveness.19 TheBoardhastakenintoaccounttheFSSA’sviewsthatChinais,overall,insatisfactory compliancewiththeBaselCorePrinciplesandthatthereareareasforfurtherimprovement.TheBoardhasalsotakenintoaccounttheresponsesbyChineseauthoritiestothe FSSAreportandtheprogressmadebyChineseauthoritiestoaddresstheissuesraisedin thatreport. Basedonallthefactsof record,includingitsreviewof thesupervisoryframeworkimplementedbytheCBRCforABC,theBoardhasdeterminedthatABCissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.ThisdeterminationisspecifictoABC.20Bystatute,theBoardmustreviewthisdeterminationin processingfutureapplicationsinvolvingABCandalsomustmakeadeterminationof comprehensive,consolidatedsupervisioninotherapplicationsinvolvingdifferentapplicants fromChina. Aspartof theBoard’ssupervisoryprogramforforeignbanks,theBoardactivelymonitors changestothesupervisorysystemsinthehomecountriesof foreignbanks,aswellasdifferencesthatmayexistinthesupervisoryframeworkasitisappliedbyahomecountryto 16 FSSAat64;DARat16. 17 DARat7. 18 FSSAat39-42and69-71;DARat99-101.Chinareceivedamateriallynoncompliantratingintwoofthethirty areasassessedbytheFSSA.Specifically,theFSSAratedChinaasmateriallynoncompliantfortheBaselCore Principlesonindependence,accountabilityandtransparency,andriskmanagementprocess.DARat17and19. TheFSSAstatedthat“budgetingarrangements,externalheadcountapprovalrequirementsand[theauthority fortheStateCounciltooverride]rulesanddecisionscompromiseCBRCeffectivenessandcouldaffectoperationalindependence.”FSSAat64;DARat17.TheFSSAviewedtheguidancethattheCBRChasissuedinrisk managementtobeconsistentwithinternationalstandardsbutfoundthatbankinginstitutions’compliance withCBRCguidancewaslacking(althoughrecognizingthattheguidanceonsomerisks“isrecentandsocould notbeexpectedtobecompliedwithasyet”).FSSAat61;seealsoDARat53.Theassessmentteamalso believedthatChinesebanksingeneraldonotyethaverobustenterprise-widerisk-managementsystems.FSSA at66;DARat53-54.Forcomparison,theUnitedKingdomandGermanyreceivedthreeandtwomaterially noncompliantratings,respectively,andtheUnitedStatesreceivedonemateriallynoncompliantrating,intheir recentfinancialsystemstabilityassessments. 19 FSSAat71-73;DARat101-103.Chineseauthoritiesrespondedthat,bylawinChina,theStateCouncilofthe People’sRepublicofChina(“StateCouncil”)mayalterorannularuleorguidelineoftheCBRConlyifthe ruleorguidelineviolatesapplicablelawandthattheStateCouncilhasneveralteredorannulledtherulesand guidelinesissuedbytheCBRC.ChineseauthoritiesalsonotedthattheStateCouncilhassupportedtheCBRC inundertakingbankingregulationandsupervisionandthattheCBRChasupgradedthenumberandqualityof itsstaffovertime.FSSAat71-72;DARat102.Inaddition,ChineseauthoritiesnotedthesignificantimprovementsChinahasmadeinsupervisionaswellastherelativesimplicityoftheChinesebankingsystem.FSSAat 72;DARat102-3.DespitethedifferenceinviewsaboutthedegreetowhichChinesebanks’riskmanagementis commensuratewiththecurrentriskenvironment,ChineseauthoritiesconcurredwiththeFSSAthat“continuedimprovementsinbanks’riskmanagementareneeded,asfinancialreformdeepensandliberalizationcreates greaterinterconnectednessandcomplexitiesintheChinesesystem.”FSSAat72;DARat103. 20 See58FederalRegister6348,6349(January12,1993).
288 FederalReserveBulletin|December2012 institutionsof differenttypesorsizes,andwouldcontinuetodosowithrespecttoChina. TheBoardalsointendstofurtheritsrelationshipwithChinesesupervisoryauthoritiesand continuetodevelopitsunderstandingof Chinesebankingmatters. Thegovernmentof Chinahasadoptedastatutoryregimeregardinganti-moneylaundering (“AML”)andsuspiciousactivityreportingandhascriminalizedmoney-launderingactivitiesandotherfinancialcrimes.ThePBOCsupervisesandexaminesChinesebankswith respecttoAMLandcoordinateseffortsamongotheragencies.ThePBOCcollects,monitors,analyzes,anddisseminatessuspicioustransactionreportsandlarge-valuetransaction reports. ThePBOCovertimehasincreasedrequirementsforitssupervisedinstitutionsregarding AMLcompliance.ThePBOCissuedrulesprovidingclarificationof,orfurtherstrengtheningtheimplementationof,operatingprocedures,customerduediligenceandriskclassification,recordkeeping,AMLmonitoringandreportingsuspicioustransactions,andtheinternationalremittanceagencybusiness.ThePBOCalsorequiresthedesignationof achief AMLcomplianceofficerasahigh-levelmanagertoensureprovisionof adequateAML resourcesandtimelyflowof informationtoemployeesresponsibleforAMLcompliance throughouttheinstitution.Inaddition,thePBOCrequirestheriskratingof customersand thefilingof reportsonsuspiciousactivityandcertainothertransactions.Banksare requiredto(1)establishacustomeridentificationsysteminaccordancewithapplicable rulesjointlypromulgatedbythePBOCandthreefunctionalfinancialservicesregulators;21 (2)recordtheidentitiesof customersandinformationrelatingtoeachtransaction;and (3)retainretailtransactiondocumentsandbooks.Supervisedinstitutionshavebeen encouragedtomovebeyondaprescriptive-criteriabasistoincludeamoreexpansiveand risk-basedapproachtosuspiciousactivitydetectionandreporting. Chinaparticipatesininternationalforathataddressthepreventionof moneylaundering andterroristfinancing.Chinabecameamemberof theFinancialActionTaskForce (“FATF”)inJune2007.Chinaalsoisamemberof theEurasianGroup(“EAG”),aFATFstyleregionalbodythatsupportsmembercountriesintheireffortstocreateandmaintain anappropriatelegalandinstitutionalframeworktocombatmoneylaunderingandterrorist financinginlinewithFATFstandards.22EAGevaluatesitsmemberstates’AMLand counter-terroristfinancing(“CFT”)systemsforcompliancewithinternationalstandards. Inthemostrecentmutualevaluationreportof China,datedFebruary17,2012,theFATF consideredChinatobefullyorlargelycompliantwithalmostallof theFATFrecommendationsandheldthatChinahaseffectiveAMLandCFTsystemsinforce.Asaresult,the FATFhasremovedChinafromitsregularfollow-upprocess.23 21 ThoseregulatorsaretheCBRC,CSRC,andCIRC. 22 Chinaalsoisapartytootheragreementsthataddressmoneylaunderingorterroristfinancing,includingthe U.N.ConventionAgainsttheIllicitTrafficofNarcoticsandPsychotropicSubstances,theU.N.Convention AgainstTransnationalOrganizedCrime,theU.N.ConventionAgainstCorruption,andtheU.N.International ConventionfortheSuppressionoftheFinancingofTerrorism. 23 FATF,ChinaMutualEvaluation8thFollow-upReport,Anti-MoneyLaunderingandCombatingtheFinancingof Terrorism(February17,2012),availableatwww.fatfgafi.org/dataoecd/5/34/49847246.pdf.Thereportnoted thatChinahasmadesignificantprogresstoaddresstheremainingdeficienciesandhas“reachedasatisfactory levelofcompliancewithallsixcoreRecommendationsandeightofthe[ten]keyRecommendations.”Idat para.41.InoneofthekeyRecommendationswhereChinahasnotattainedasatisfactorylevelofcompliance (implementationofinternationalinstrumentsrelatedtoterroristfinancing),Chinahassubstantiallyaddressed partofthedeficiencyandcontinuestomakeprogress.WithrespecttotheotherkeyRecommendation(freezing ofterrorist-relatedassets),ChinahasmadesignificantprogresssinceJune2011toimproveitsimplementation. Inparticular,Chinahasimplementedlegislationestablishingalegislativeframeworkandadministrative authorityforenforcementandhasrespondedtoforeignrequeststofreezeassets.TheFATFwasoftheview thatChinashouldenactadditionalguidancetoimproveimplementation,andChineseauthoritiesarecurrently draftingrulestodoso.Id.atparas.150-52and157-59.
LegalDevelopments:SecondQuarter,2012 289 Moreover,theChinesegovernmentissuesrulesonimplementingUnitedNationssanctions andmaytakeenforcementactionstoensurecompliancewiththosesanctions.ThePBOCis alsoresponsiblefordisseminatinginformationtothebankingindustryregardingU.N. sanctionsandsupervisingtheenforcementof thosesanctions. ThePBOCsupervisesandregulatescompliancebyABCwithAMLrequirementsthrough acombinationof on-siteexaminationsandoff-sitemonitoring.Onsiteexaminationsfocus onABC’scompliancewithAMLlawsandrules.ThePBOC’sheadquartersconductsinvestigationsof afinancialinstitution’sheadoffice,andthePBOC’sbranchesconductinvestigationsof theinstitution’sbranchofficesinthesamelocalityasthePBOCbranches. Duringthecourseof anon-siteexamination,thePBOCwillgenerallyreviewaccount information,transactionrecords,andanyotherrelevantmaterials.Uponcompletionof an investigation,if AMLdeficienciesareidentified,thePBOCmayissuesanctionsandproposethatremedialmeasuresbeimposedbyappropriategovernmentagenciesorregulators againstthefinancialinstitutionandcanreferanysuspectedmoneylaunderingtolaw enforcementauthoritiesforfurtherinvestigation.ThePBOCperformsoff sitemonitoring throughperiodicreportsandhasestablishedrequirementsforChinesebankstosubmit suchreports.Inordertoimproveoff-sitesupervisionandmonitoringof large-amountcash transactions,thePBOCdevelopedaninteractiveinformationtechnologysystemforAML/ CFTsupervisionthathasbeeninoperationsinceOctober2010inboththePBOCand financialinstitutions. ABChaspoliciesandprocedurestocomplywithChineselawsandrulesregardingAML. ABCstatesthatithasimplementedmeasuresconsistentwiththerecommendationsof the FATFandthatithasputinplacepolicies,procedures,andcontrolstoensureongoing compliancewithallstatutoryandregulatoryrequirements,includingdesignatingAML compliancepersonnelandconductingroutineemployeetrainingatallABCbranches. ABC’scompliancewithAMLrequirementsismonitoredbythePBOCandby ABC’sinternalandexternalauditors. Basedonallthefactsof record,theBoardhasdeterminedthattheAMLeffortsbyABC anditshomecountrysupervisorsareconsistentwithapproval. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsinthiscase.Asnoted above,theCBRCrequiresChinesebankstofollowtheBaselICapitalAccordwithcertain enhancementsfromtheBaselIICapitalAccord.24Thecapitallevelsof ABCexceedthe minimumlevelsthatwouldberequiredundertheBaselICapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldberequiredof aU.S.bankingorganization.Managerialandotherfinancialresourcesof ABCareconsistentwithapproval,and ABCappearstohavetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,ABChasestablishedcontrolsandproceduresfortheproposedbranchtoensurecompliancewithU.S.lawandforitsoperationsingeneral.Inparticular,ABChasstatedthatit willapplystrictAMLpoliciesandproceduresatthebranchconsistentwithU.S.lawand regulationandwillestablishaninternalcontrolsystematthebranchconsistentwithU.S. requirementstoensurecompliancewiththosepoliciesandprocedures. WithrespecttoaccesstoinformationaboutABC’soperations,theBoardhasreviewedthe restrictionsondisclosureinrelevantjurisdictionsinwhichABCoperatesandhascommunicatedwithrelevantgovernmentauthoritiesregardingaccesstoinformation.ABChas committedtomakeavailabletotheBoardsuchinformationontheoperationsof ABCand anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliance 24 TheCBRCalsorequiresalllarge,internationallyactivebanks,suchasABC,tohaveaminimumrisk-basedtier 1capitalratioof9percentandtotalcapitalratioof11.5percent.ABC’scapitalratiosexceedtheselevels.
290 FederalReserveBulletin|December2012 withtheIBA,theBHCAct,andotherapplicablefederallaws.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylaworotherwise,ABCalso hascommittedtocooperatewiththeBoardtoobtainanywaiversorexemptionsthatmay benecessarytoenableitoritsaffiliatestomakesuchinformationavailabletotheBoard. TheBoardalsohasconsultedwiththeCBRCaboutaccesstoinformation.TheCBRChas representedthatitwouldfacilitatetheBoard’saccesstoinformationandhasenteredintoa statementof cooperationwiththeBoardandotherU.S.bankingregulatorswithrespectto thesharingof supervisoryinformation.25Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,theBoardhasdeterminedthatABC hasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoard mayrequest. Chinahasmadeprogresstowardadoptingasystemof financialregulationforitsfinancial systemtomitigatetherisktofinancialstabilityfromitsbanks.ThePBOC,CBRC,other financialsupervisoryagencies,andotheragenciesinChinahavetakenjointmeasuresto maintainfinancialstability.Chinahasestablishedasystemof preliminaryindicatorsfor monitoringfinancialstability,developedmethodologyandoperationalframeworksfor monitoringfinancialrisks,andpublishedanannualChinaFinancialStabilityReportsince 2005.TheCBRChasestablishedmechanismstocooperatewithsupervisoryauthoritiesin atleast25othercountriesforthesupervisionof cross-borderbanking.Inaddition,the PBOCandCBRCofficiallyjoinedtheBaselCommitteeonBankingSupervisiononbehalf of Chinaandsincetheiraccession,haveactivelyparticipatedintherevisionof theBaselII CapitalAccord,intheformulationof theBaselIIICapitalAccord,andinotherworking groups.Chinaalsoisactiveintheongoingworkof theFinancialStabilityBoard.U.S. bankregulatorsandotherbanksupervisorsinpertinentjurisdictionsparticipatedintwo supervisorycollegeshostedbytheCBRC:oneforICBCin2009andoneforCCBin2011. Moreover,authoritiesintheUnitedStatesandChinathatareresponsiblefortheoversight of auditingservicesforpubliccompaniesareengagedincontinuingdiscussionswith respecttoenhancingcross-bordercooperation,andtheBoardlooksforwardtotimely negotiationof anagreementrelatingtocooperativeactionsbytheseauthorities. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyABC,as wellasthetermsandconditionssetforthinthisorder,ABC’sapplicationtoestablisha branchisherebyapproved.TheBoardconditionsitsdecisiononABCprovidingtothe Boardadequateinformationonitsoperationsandactivitiesaswellasthoseof itsaffiliates todetermineandenforcecompliancebyABCoritsaffiliateswithapplicablefederalstatutes.Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof ABCoranyof itsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyABCoritsaffiliateswithapplicablefederal statutes,theBoardmayrequireterminationordivestitureof anyof ABC’soritsaffiliates’ directorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyABCwiththecommitmentsmadetotheBoardin connectionwiththisapplicationandwiththeconditionsinthisorder.26Thecommitments andconditionsreferredtoaboveareconditionsimposedinwritingbytheBoardinconnectionwiththisdecisionandmaybeenforcedinproceedingsunder12U.S.C.U.S.C.§1818 againstABCanditsaffiliates. Byorderof theBoardof Governors,effectiveMay9,2012. 25 SeeMemorandumofUnderstandingbetweentheCBRCandtheBoard,theOfficeoftheComptrollerofthe Currency,andtheFederalDepositInsuranceCorporation,June17,2004. 26 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthority oftheNewYorkStateDepartmentofFinancialServicestolicenseofficesofaforeignbank.
LegalDevelopments:SecondQuarter,2012 291 Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Bank of China Limited Beijing, People’s Republic of China OrderApprovingEstablishmentof aBranch FRBOrderNo.2012–6(May9,2012) Bankof ChinaLimited(“BOC”),Beijing,People’sRepublicof China,aforeignbank withinthemeaningof theInternationalBankingAct(“IBA”),hasappliedundersection7(d)of theIBA1toestablishafederalbranchinChicago,Illinois.TheForeignBank SupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeign bankmustobtaintheapprovalof theBoardtoestablishabranchintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinChicago(TheChicagoSun-Times, August16,2010).Thetimeforfilingcommentshasexpired,andtheBoardhasconsidered allcommentsreceived. BOC,withtotalassetsof approximately$1.87trillion,isthethirdlargestbankinChina.2 Thegovernmentof Chinaownsapproximately71percentof BOC’sshares.3Noother shareholderownsmorethan5percentof thesharesof BOC.4 BOCengagesprimarilyinretailandcommercialbankingthroughoutChina,including HongKongSARandMacauSAR.OutsideChina,BOCoperatesanetworkof banksubsidiaries,branches,andrepresentativeofficesin29countries.IntheUnitedStates,BOC operatestwoinsuredfederalbranchesinNewYorkCityandanuninsuredlimitedfederal 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofDecember31,2011. 3 CentralHuijinInvestmentLtd.(“Huijin”)ownsapproximately67.6percent,andTheNationalCouncilfor SocialSecurityFundholdsapproximately3.3percentofBOC’sshares.Huijinwasformedtoassistinthe restructuringofmajorChinesebanks.ThegovernmenttransferredsharesofseveralChinesebanks,including BOC,toHuijinatthetimeoftherecapitalizationandrestructuringofthesebanksbetween2004and2006. HuijinalsoownsamajorityinterestinChinaConstructionBankCorporation(“CCB”),andtogetherwiththe ChineseMinistryofFinance,itownsamajorityinterestinIndustrialandCommercialBankofChinaLimited (“ICBC”)andAgriculturalBankofChinaLimited(“ABC”),allofBeijing.CCBandICBCeachoperatea branchinNewYorkCity.ThegovernmentofChinatransferredtheownershipofHuijintoChinaInvestment Corporation(“CIC”),aninvestmentfundthatisalsowhollyownedbythegovernmentofChina.CICowns 9.9percentofthesharesofMorganStanley,NewYork,NewYork,abankholdingcompanythatownsabank inUtahandabankinNewYork.BothCICandHuijinarenonoperatingcompaniesthatholdinvestmentson behalfofthegovernmentofChina.NeitherCICnorHuijinengagesdirectlyincommercialorfinancialactivities. UndertheIBA,anycompanythatownsaforeignbankwithabranchintheUnitedStatesissubjecttothe BankHoldingCompanyAct(“BHCAct”)asifitwereabankholdingcompany.Becauseoftheirownershipof BOC,CCB,andICBC,CICandHuijinaresubjecttotheBHCAct.TheBoardhasprovidedcertainexemptionstoCICandHuijinundersection4(c)(9)oftheBHCAct(12U.S.C.§1843(c)(9)),whichauthorizesthe BoardtograntexemptionstoforeigncompaniesfromthenonbankingrestrictionsoftheBHCActwhenthe exemptionswouldnotbesubstantiallyatvariancewiththepurposesoftheactandwouldbeinthepublicinterest.TheexemptionsprovidedtoCICandHuijinwouldnotextendtoBOCoranyotherbankingsubsidiaryof CICorHuijinthatoperatesabranchoragencyintheUnitedStates.SeeBoardlettertoH.RodginCohen, Esq.,datedAugust5,2008. 4 HKSCCNomineesLimitedholdsanadditionalapproximately29percentofthesharesofBOCastheregisterednomineeofseveralshareholders,eachofwhichownslessthan5percentofthesharesofBOC.
292 FederalReserveBulletin|December2012 branchinLosAngeles,aswellasnonbankingactivitiesundersection4(c)(8)of theBHC Act.5BOCisaqualifyingforeignbankingorganizationunderRegulationK.6 TheproposedChicagobranchwouldengageinwholesaledeposittaking,lending,trade finance,andotherbankingservices. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates;(2)hasfurnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately;and(3)issubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.7Inassessingthecomprehensive,consolidatedsupervisionstandard,theBoardhasconsideredtheBaselCore PrinciplesforEffectiveBankingSupervision(“BaselCorePrinciples”),8whicharerecognizedastheinternationalstandardforassessingthequalityof banksupervisorysystems, includingwithrespecttocomprehensive,consolidatedsupervision.9TheBoardalsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.10 Asnotedabove,BOCengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. BOCalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. Foranumberof years,authoritiesinChinahavecontinuedtoenhancethestandardsof consolidatedsupervisiontowhichbanksinChinaaresubject,includingthroughadditional 5 12U.S.C.§1843(c)(8).BOCalsocontrolsawhollyownedsubsidiarybank,NanyangCommercialBank,Limited,HongKongSAR,People’sRepublicofChina,thatoperatesafederalbranchinSanFrancisco. 6 12CFR211.23(a). 7 12U.S.C.§3105(d)(2);12CFR211.24.RegulationKprovidesthataforeignbankissubjecttoconsolidated homecountrysupervisioniftheforeignbankissupervisedorregulatedinsuchamannerthatitshomecountry supervisorreceivessufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanyaffiliate)toassesstheforeignbank’soverallfinancialconditionandcompliance withlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthisstandard,theBoardconsiders,amongother indiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors: (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetween thebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyandrisk assetexposure,onaworldwidebasis.Nosinglefactorisdeterminative,andotherelementsmayinformthe Board’sdetermination.TheBoardhaslongheldthat“thelegalsystemsforsupervisionandregulationvary fromcountrytocountry,andcomprehensivesupervisionorregulationonaconsolidatedbasiscanbeachieved indifferentways.”57FederalRegister12992,12995(April15,1992). 8 SeeBankforInternationalSettlements,BaselCommitteeonBankingSupervision,CorePrinciplesforEffective BankingSupervision(October2006),availableatwww.bis.org/publ/bcbs129.pdf. 9 Seee.g.,93rdAnnualReportoftheBoardofGovernorsoftheFederalReserveSystem(2006),at76(“The CorePrinciples,developedbytheBaselCommitteein1997,havebecomethedefactointernationalstandard forsoundprudentialregulationandsupervisionofbanks.”). 10 12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2)-(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;thefinancialandmanagerialresourcesofthebank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountrytoaddress moneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankhasprovidedtheBoardwithadequateassurancesthatitwillmake availabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofitsaffiliatesthattheBoard deemsnecessarytodetermineandenforcecompliancewiththeIBAandotherapplicablefederalbankingstatutes;whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthecommunity;the bank’srecordofoperation.TheBoardalsoconsiders,inthecaseofaforeignbankthatpresentsarisktothe stabilityoftheUnitedStates,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuch homecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E).
LegalDevelopments:SecondQuarter,2012 293 orrefinedstatutoryauthority,regulations,andguidance;adoptionof internationalstandardsandbestpractices;enhancementstothesupervisorysystemarisingoutof supervisoryexperiences;upgradestotheChinaBankingRegulatoryCommission(“CBRC”),the agencywithprimaryresponsibilityforthesupervisionandregulationof Chinesebanking organizations,intheareasof organization,technologicalcapacity,staffing,andtraining; andincreasedcoordinationbetweentheCBRCandotherfinancialsupervisoryauthorities inChina.11 TheBoardhasreviewedtherecordinthiscaseandhasdeterminedthattheenhancements tostandardsof banksupervisioninChinawithrespecttoBOCwarrantafindingthat BOCissubjecttocomprehensive,consolidatedsupervisionbyitshomecountrysupervisors.Inmakingthisdetermination,theBoardhasconsideredthattheCBRCistheprincipalsupervisoryauthorityof BOC,includingitsforeignsubsidiariesandaffiliates,forall mattersotherthanmoneylaundering.12TheCBRChasprimaryresponsibilityandauthorityforregulatingtheestablishmentandactivitiesandtheexpansionanddissolutionof bankinginstitutions,bothdomesticallyinChinaandabroad.TheCBRChasnoobjection toBOC’sestablishmentof theproposedbranch.TheCBRCmonitorsChinesebanks’consolidatedfinancialcondition,compliancewithlawsandregulations,andinternalcontrols throughacombinationof on-siteexaminations,off-sitesurveillancethroughthereviewof requiredregulatoryreportsandexternalauditreports,andinteractionwithsenior management. Sinceitsestablishmentin2003,theCBRChasaugmenteditssupervisorystructure,staffing,andinternaloperations;enhanceditsexistingsupervisoryprograms;anddeveloped newpoliciesandprocedurestocreateaframeworkfortheconsolidatedsupervisionof the largestbanksinChina.TheCBRCalsohasstrengtheneditssupervisoryregimerelatedto accountingrequirementsandstandardsforloanclassification,internalcontrols,riskmanagement,andcapitaladequacy,andithasdevelopedandimplementedariskfocusedsupervisoryframework. TheCBRChasissuedadditionalguidanceinvarioussupervisoryareas,includingstricter prudentialrequirementsforcapital,loan-lossallowancecoverage,executivecompensation, banks’equityinvestmentsininsurancecompanies,andenhancedrisk-managementrequirementsforoperations,liquidity,derivatives,reputational,andmarketrisk.Theguidanceis designedtomakesupervisionmoreriskfocusedandtostrengthenpracticesconsistentwith theBaselCorePrinciples. TheCBRChasitsheadofficeinBeijingandbranchofficesinotherprovinces.Thehead officesetspolicyanddirectssupervisoryactivitiesforthelargestbanksinChina,including BOC.Althoughsomeday-to-daysupervisoryactivitiesareundertakenbytheCBRC’s branchoffices,theheadofficedirectstheseeffortsandensuresconsistencyof approach throughtrainingprogramsandfrequentcommunicationwiththebranches. 11 TheBoardhaspreviouslyapprovedapplicationsfromChinesebankstoestablishU.S.branchesunderalower standardthanthecomprehensive,consolidatedsupervisionstandard.SeeChinaMerchantsBankCo.,Limited, 94FederalReserveBulletinC24(2008);IndustrialandCommercialBankofChinaLimited,94FederalReserve BulletinC114(2008);ChinaConstructionBankCorporation,95FederalReserveBulletinB54(2009);andBank ofCommunicationsCo.,Ltd.(orderdatedApril8,2011),97FederalReserveBulletin49(2ndQuar.2011).In eachcase,theBoardmadeadeterminationthatthebank’shomecountrysupervisorswereactivelyworkingto establisharrangementsfortheconsolidatedsupervisionofthebank.12U.S.C.§3105(d)(6). 12 BeforeApril2003,thePeople’sBankofChina(“PBOC”)actedasbothChina’scentralbankandprimary bankingsupervisor,includingwithrespecttoanti-money-launderingmatters.InApril2003,theCBRCwas establishedastheprimarybankingsupervisorandassumedthemajorityofthePBOC’sbankregulatoryfunctions.ThePBOCmaintaineditsrolesasChina’scentralbankandprimarysupervisorforanti-money-launderingmatters.
294 FederalReserveBulletin|December2012 TheCBRCheadofficepreparesannualexaminationplansforthelargestChinesebanks, includingBOC.Theplansencompassbothon-andoff-siteactivities.ApplicableChinese lawandbankingregulationdonotrequirethaton-siteexaminationsbeconductedatany specifiedinterval.Inpractice,theCBRCperformson-siteexaminationsof itslargestbanks frequently,althoughoff-sitesurveillanceiscontinuous.On-siteexaminationsarescheduled basedontheCBRC’scontinuousoff-sitemonitoringtools,analysisof theinstitution’speriodicfilings,resultsof theinstitution’sinternalstresstesting,andtheinstitution’soverall riskprofileandactivities.On-siteexaminationsbytheCBRCtypicallycover,amongother things,themajorareasof operation:corporategovernanceandseniormanagement responsibilities;capitaladequacy;assetstructureandassetquality(includingstructureand qualityof loans);off-balance-sheetactivities;earnings;liquidity;liabilitystructureand fundingsources;expansionaryplans;internalcontrols(includingaccountingcontroland administrativesystems);legalcompliance;accountingsupervisionandinternalauditing; andanyotherareasdeemednecessarybytheCBRC.ThePBOCexaminesBOCforcompliancewithanti-money-launderinglawsandrequirements. ExaminationratingsarebasedontheCAMELSratingmodelandemphasizecredit-risk management,thequalityof thebank’sloanportfolio,internalcontrols,liabilitystructure, capitaladequacy,liquidity,andtheadequacyof reserves.Theareasof emphasisreflectthe factthatthelargestChinesebanks,includingBOC,engageintraditionalcommercialbankingandarenotmateriallyengagedincomplexderivativesorotheractivities.Ratingsare derivedfromoff-sitequantitativeandqualitativeanalysisandonsiteriskreviews.Examinationfindingsandareasof concernarediscussedwithseniormanagementof thebank, andcorrectiveactionstakenbythebankaremonitoredbytheCBRC.In2009,theCBRC developedaninformationtechnologysystemtoassistinonsiteexaminationsbyimproving dataanalysisandregulatoryinformationsharing. ChinesebanksarerequiredtoreportkeyregulatoryindicatorstotheCBRCperiodicallyon generalschedules.AllChinesebanksarerequiredtosubmitmonthly,quarterly,semiannual,orannualreportsrelatingtoassetquality,lendingconcentrations,capitaladequacy, earnings,liquidity,affiliatetransactions,off-balance-sheetexposures,internalcontrols,and ownershipandcontrol. BanksmustreporttotheCBRCtheirunconsolidatedcapitaladequacyratiosquarterlyand theirconsolidatedratiossemiannually.China’sbankcapitalrulesarebasedontheBaselI CapitalAccord,whiletakingintoaccountcertainaspectsof theBaselIICapitalAccord.In addition,theCBRC,asamemberof theBaselCommitteeonBankingSupervision,has supportedtheBaselIIICapitalAccordframeworkandimplementationtimeframe.The CBRCcantakeenforcementactionswhencapitalratiosorotherfinancialindicators fallbelowspecifiedlevels.Theseactionsmayincludeissuingsupervisorynotices,requiring thebanktosubmitandimplementanacceptablecapitalreplenishmentplan,restricting assetgrowth,requiringreductionof higherriskassets,restrictingthepurchaseof fixed assets,andrestrictingdividendsandotherformsof distributions.Significantlyundercapitalizedbanksmayberequiredtomakechangesinseniormanagementorrestructuretheir operations. BOC,likeotherlargeChinesebanks,isrequiredtobeauditedannuallybyanexternal accountingfirmthatmeetsthestandardsof Chineseauthorities,includingtheMinistryof Finance,PBOC,andCBRC,andtheauditresultsaresharedwiththeCBRCandPBOC. Thescopeof therequiredauditincludesareviewof BOC’sfinancialstatements,assetquality,capitaladequacy,internalcontrols,andcompliancewithapplicablelaws.Atitsdiscretion,theCBRCmayorderaspecialauditatanytime.Inaddition,inconnectionwithits listingontheShanghaiandHongKongstockexchanges,BOCisalsorequiredtoreport financialstatementsunderbothInternationalFinancialReportingStandards(“IFRS”)and
LegalDevelopments:SecondQuarter,2012 295 ChineseAccountingStandards(“CAS”).Thesefinancialstatementsareauditedbyan internationalaccountingfirmunderapplicableIFRSauditingstandards.13 BOCconductsinternalauditsof itsofficesandoperations,includingitsoverseasoperations,generallyonanannualschedule.TheinternalauditresultsaresharedwiththeCBRC, thePBOC,andBOC’sexternalauditors.Theproposedbranchwouldbesubjecttointernal audits. Chineselawimposesvariousprudentiallimitationsonbanks,includinglimitsontransactionswithaffiliatesandonlargeexposures.14Related-partytransactionsincludecredit extensions,assettransfers,andtheprovisionof anytypeof services.Chinesebanksare requiredtoadoptappropriatepoliciesandprocedurestomanagerelated-partytransactions,andtheboardof directorsmustappointacommitteetosupervisesuchtransactions andrelationships.Applicablelawsrequireallrelated-partytransactionstobeconductedon anarm’s-lengthbasis. Chinesebankinglawalsoestablishessingle-borrowercreditlimits.Loanstoasingleborrowermaynotexceed10percentof thebank’stotalregulatorycapital,theaggregatelendingtoagroupof relatedcompaniesmaynotexceed15percentof thebank’stotalregulatorycapital,andtheaggregateamountof creditgrantedtoallrelatedpartiesmaynot exceed50percentof thebank’stotalregulatorycapital.Thestatusof related-partytransactionsmustbereportedtotheCBRCquarterly. Inaddition,theCBRChascertainoperationallimitationsforcommercialbanksinChina relatingtomatterssuchasliquidityandforeigncurrencyexposure.In2009,theCBRC issuednewrulesconcerningliquiditymanagementandcorporategovernance.Compliance withtheselimitsismonitoredbytheCBRCthroughperiodicreportsandreviewedduring on-siteexaminations. TheCBRCisauthorizedtorequireanybanktoprovideinformationandtoimposesanctionsforfailuretocomplywithsuchrequests.If theCBRCdeterminesthatabankisnotin compliancewithbankingregulationsandprudentialstandards,itmayimposevarious sanctionsdependingupontheseverityof theviolation.TheCBRCmaysuspendapproval of newproductsornewoffices,suspendpartof thebank’soperations,imposemonetary penalties,andinmoreseriouscases,replacemanagementof thebank.TheCBRCalsohas authoritytoimposeadministrativepenalties,includingwarningsandfinesforviolationsof applicablelawsandrules.Criminalviolationsaretransferredtothejudicialauthoritiesfor investigationandprosecution. 13 CASlargelyconformtoIFRS,suchthattherecurrentlyarenomaterialdifferencesbetweenfinancialstatementsproducedforHongKongreportingrequirementsandChinesereportingrequirements.TheInternational MonetaryFund’s(“IMF”)financialsystemstabilityassessmentreportandtheaccompanyingdetailedassessmentreportofobservancewiththeBaselCorePrinciples,discussedindetailbelow,bothfoundthat“[s]ince 2005,[CAS]havesubstantiallyconvergedwith[IFRS]andInternationalStandardsonAuditing,respectively.” IMF,People’sRepublicofChina,FinancialSystemStabilityAssessmentat57(June24,2011);IMFandWorld Bank,People’sRepublicofChina:DetailedAssessmentReportofObservancewithBaselCorePrinciplesfor EffectiveBankingSupervisionat9(April2012).Inaddition,theWorldBankReportonObservanceofStandardsandCodesdeterminedthatCASandIFRSarebasicallycompatibleandthattheChineseauthoritiesand theInternationalAccountingStandardsBoardhaveestablishedacontinuingconvergencemechanismdesigned toachievefullconvergencein2012.WorldBank,ReportonObservanceofStandardsandCodes(ROSC) AccountingandAuditing–People’sRepublicofChinaatExecutiveSummaryandat12(October2009),available atwww.worldbank.org/ifa/rosc_aa_chn.pdf. 14 TheCBRCdefinitionofan“affiliate”ora“relatedparty”ofabankincludessubsidiaries,associates/jointventures,shareholdersholding5percentormoreofthebank’sshares,andkeymanagementpersonnel(and immediaterelatives)andthoseindividual’sotherbusinessaffiliations.
296 FederalReserveBulletin|December2012 BOCissubjecttosupervisionbyseveralotherfinancialregulators,includingtheState AdministrationforForeignExchange,ChinaSecuritiesRegulatoryCommission (“CSRC”),andChinaInsuranceRegulatoryCommission(“CIRC”).Theseagenciesreceive periodicfinancialandoperationsreports,andtheymayconducton-siteexaminationsand imposeadditionalreportingrequirements.Chinesefinancialsupervisorscoordinate supervisionandsharesupervisoryinformationaboutChinesefinancialinstitutionsas appropriate. TheIMFrecentlyconcludedafinancialsystemstabilityassessmentof China(“FSSA”), includinganassessmentof China’scompliancewiththeBaselCorePrinciples.15TheFSSA determinedthatChina’soverallregulatoryandsupervisoryframeworkadherestointernationalstandards.16TheFSSAfoundthat“[t]helaws,rulesandguidancethatCBRCoperatesundergenerallyestablishabenchmarkof prudentialstandardsthatisof highquality andwasdrawnextensivelyfrominternationalstandardsandthe[BaselCorePrinciples] themselves.”17TheFSSAadditionallynotedthat“[c]onsolidatedsupervisionof banksand theirdirectsubsidiariesandbranchesonthemainlandoroffshoreisof highquality.”18 WithrespecttotheCBRC,theFSSAfoundasfollows: Allthebanks,auditors,ratingsagenciesandothermarketparticipantsthatthemission interactedwithwereunhesitatingintheirregardfortherolethattheCBRChasplayedin drivingprofessionalism,riskmanagementandinternationalrecognitionof theChinese bankingsystem.Inparticular,themissionobservedthat[theCBRC]hasbeenthekeydrivingforceindrivingimprovementsinriskmanagement,corporategovernanceandinternal controlanddisclosureinChinesebanks.19 Basedonitsreview,theFSSAratedChina’soverallcompliancewiththeBaselCorePrinciplesassatisfactory.Ingivingthisoverallrating,theFSSAnotedseveralareasthatmeritedimprovementandmadespecificrecommendationsforcontinuedadvancesinsupervisionandregulation.20TheChineseauthoritiesnotedthatsomeof therecommendationsof 15 TheassessmentreflectstheregulatoryandsupervisoryframeworkinplaceasofJune24,2011.IMF,People’s RepublicofChina,FinancialSystemStabilityAssessment(June24,2011),availableatwww.imf.org/external/ pubs/ft/scr/2011/cr11321.pdf.TheFSSAcoversanevaluationofthreecomponents:(1)thesource,probability, andpotentialimpactofthemainriskstomacrofinancialstabilityinthenearterm;(2)thecountry’sfinancial stabilitypolicyframework;and(3)theauthorities’capacitytomanageandresolveafinancialcrisisshouldthe risksmaterialize.TheFSSAisakeyinputtoIMFsurveillance.TheFSSAisaforward-lookingexercise,unlike theBoard’sassessmentofthecomprehensiveconsolidatedsupervisionofanapplicant. TheIMFandWorldBankseparatelypublishadetailedassessmentofthecountry’sobservanceoftheBasel CorePrinciplesthatdiscussesthecountry’sadherencetotheBaselCorePrinciplesinmuchgreaterdetail.See IMFandWorldBank,People’sRepublicofChina:DetailedAssessmentReportofObservancewithBaselCore PrinciplesforEffectiveBankingSupervision(April2012)(“DAR”),availableatwww.imf.org/external/pubs/ft/ scr/2012/cr1278.pdf. 16 FSSAat39. 17 Id.at59;DARat12. 18 FSSAat64;DARat16. 19 DARat7. 20 FSSAat39-42and69-71;DARat99-101.Chinareceivedamateriallynoncompliantratingintwoofthethirty areasassessedbytheFSSA.Specifically,theFSSAratedChinaasmateriallynoncompliantfortheBaselCore Principlesonindependence,accountabilityandtransparency,andriskmanagementprocess.DARat17and19. TheFSSAstatedthat“budgetingarrangements,externalheadcountapprovalrequirementsand[theauthority fortheStateCounciltooverride]rulesanddecisionscompromiseCBRCeffectivenessandcouldaffectoperationalindependence.”FSSAat64;DARat17.TheFSSAviewedtheguidancethattheCBRChasissuedinrisk managementtobeconsistentwithinternationalstandardsbutfoundthatbankinginstitutions’compliance withCBRCguidancewaslacking(althoughrecognizingthattheguidanceonsomerisks“isrecentandsocould notbeexpectedtobecompliedwithasyet”).FSSAat61;seealsoDARat53.Theassessmentteamalso believedthatChinesebanksingeneraldonotyethaverobustenterprise-widerisk-managementsystems.FSSA at66;DARat53-54.Forcomparison,theUnitedKingdomandGermanyreceivedthreeandtwomaterially noncompliantratings,respectively,andtheUnitedStatesreceivedonemateriallynoncompliantrating,intheir recentfinancialsystemstabilityassessments.
LegalDevelopments:SecondQuarter,2012 297 theFSSAarealreadybeingimplementedandthatotherswillbetakenintoaccountinthe CBRC’splanstoimprovesupervisoryeffectiveness.21 TheBoardhastakenintoaccounttheFSSA’sviewsthatChinais,overall,insatisfactory compliancewiththeBaselCorePrinciplesandthatthereareareasforfurtherimprovement.TheBoardhasalsotakenintoaccounttheresponsesbyChineseauthoritiestothe FSSAreportandtheprogressmadebyChineseauthoritiestoaddresstheissuesraisedin thatreport. Basedonallthefactsof record,includingitsreviewof thesupervisoryframeworkimplementedbytheCBRCforBOC,theBoardhasdeterminedthatBOCissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.ThisdeterminationisspecifictoBOC.22Bystatute,theBoardmustreviewthisdeterminationin processingfutureapplicationsinvolvingBOCandalsomustmakeadeterminationof comprehensive,consolidatedsupervisioninotherapplicationsinvolvingdifferentapplicants fromChina. Aspartof theBoard’ssupervisoryprogramforforeignbanks,theBoardactivelymonitors changestothesupervisorysystemsinthehomecountriesof foreignbanks,aswellasdifferencesthatmayexistinthesupervisoryframeworkasitisappliedbyahomecountryto institutionsof differenttypesorsizes,andwouldcontinuetodosowithrespecttoChina. TheBoardalsointendstofurtheritsrelationshipwithChinesesupervisoryauthoritiesand continuetodevelopitsunderstandingof Chinesebankingmatters. Thegovernmentof Chinahasadoptedastatutoryregimeregardingantimoneylaundering (“AML”)andsuspiciousactivityreportingandhascriminalizedmoneylaunderingactivitiesandotherfinancialcrimes.ThePBOCsupervisesandexaminesChinesebankswith respecttoAMLandcoordinateseffortsamongotheragencies.ThePBOCcollects,monitors,analyzes,anddisseminatessuspicioustransactionreportsandlarge-valuetransaction reports. ThePBOCovertimehasincreasedrequirementsforitssupervisedinstitutionsregarding AMLcompliance.ThePBOCissuedrulesprovidingclarificationof,orfurtherstrengtheningtheimplementationof,operatingprocedures,customerduediligenceandriskclassification,recordkeeping,AMLmonitoringandreportingsuspicioustransactions,andtheinternationalremittanceagencybusiness.ThePBOCalsorequiresthedesignationof achief AMLcomplianceofficerasahigh-levelmanagertoensureprovisionof adequateAML resourcesandtimelyflowof informationtoemployeesresponsibleforAMLcompliance throughouttheinstitution.Inaddition,thePBOCrequirestheriskratingof customersand thefilingof reportsonsuspiciousactivityandcertainothertransactions.Banksare requiredto(1)establishacustomeridentificationsysteminaccordancewithapplicable rulesjointlypromulgatedbythePBOCandthreefunctionalfinancialservicesregulators;23 21 FSSAat71-73;DARat101-103.Chineseauthoritiesrespondedthat,bylawinChina,theStateCouncilofthe People’sRepublicofChina(“StateCouncil”)mayalterorannularuleorguidelineoftheCBRConlyifthe ruleorguidelineviolatesapplicablelawandthattheStateCouncilhasneveralteredorannulledtherulesand guidelinesissuedbytheCBRC.ChineseauthoritiesalsonotedthattheStateCouncilhassupportedtheCBRC inundertakingbankingregulationandsupervisionandthattheCBRChasupgradedthenumberandqualityof itsstaffovertime.FSSAat71-72;DARat102.Inaddition,ChineseauthoritiesnotedthesignificantimprovementsChinahasmadeinsupervisionaswellastherelativesimplicityoftheChinesebankingsystem.FSSAat 72;DARat102-3.DespitethedifferenceinviewsaboutthedegreetowhichChinesebanks’riskmanagementis commensuratewiththecurrentriskenvironment,ChineseauthoritiesconcurredwiththeFSSAthat“continuedimprovementsinbanks’riskmanagementareneeded,asfinancialreformdeepensandliberalizationcreates greaterinterconnectednessandcomplexitiesintheChinesesystem.”FSSAat72;DARat103. 22 See58FederalRegister6348,6349(January12,1993). 23 ThoseregulatorsaretheCBRC,CSRC,andCIRC.
298 FederalReserveBulletin|December2012 (2)recordtheidentitiesof customersandinformationrelatingtoeachtransaction;and (3)retainretailtransactiondocumentsandbooks.Supervisedinstitutionshavebeen encouragedtomovebeyondaprescriptive-criteriabasistoincludeamoreexpansiveand risk-basedapproachtosuspiciousactivitydetectionandreporting. Chinaparticipatesininternationalforathataddressthepreventionof moneylaundering andterroristfinancing.Chinabecameamemberof theFinancialActionTaskForce (“FATF”)inJune2007.Chinaalsoisamemberof theEurasianGroup(“EAG”),aFATFstyleregionalbodythatsupportsmembercountriesintheireffortstocreateandmaintain anappropriatelegalandinstitutionalframeworktocombatmoneylaunderingandterrorist financinginlinewithFATFstandards.24EAGevaluatesitsmemberstates’AMLand counter-terroristfinancing(“CFT”)systemsforcompliancewithinternationalstandards. Inthemostrecentmutualevaluationreportof China,datedFebruary17,2012,theFATF consideredChinatobefullyorlargelycompliantwithalmostallof theFATFrecommendationsandheldthatChinahaseffectiveAMLandCFTsystemsinforce.Asaresult,the FATFhasremovedChinafromitsregularfollow-upprocess.25 Moreover,theChinesegovernmentissuesrulesonimplementingUnitedNationssanctions andmaytakeenforcementactionstoensurecompliancewiththosesanctions.ThePBOCis alsoresponsiblefordisseminatinginformationtothebankingindustryregardingU.N. sanctionsandsupervisingtheenforcementof thosesanctions. ThePBOCsupervisesandregulatescompliancebyBOCwithAMLrequirementsthrough acombinationof on-siteexaminationsandoff-sitemonitoring.Onsiteexaminationsfocus onBOC’scompliancewithAMLlawsandrules.ThePBOC’sheadquartersconductsinvestigationsof afinancialinstitution’sheadoffice,andthePBOC’sbranchesconductinvestigationsof theinstitution’sbranchofficesinthesamelocalityasthePBOCbranches. Duringthecourseof anon-siteexamination,thePBOCwillgenerallyreviewaccount information,transactionrecords,andanyotherrelevantmaterials.Uponcompletionof an investigation,if AMLdeficienciesareidentified,thePBOCmayissuesanctionsandproposethatremedialmeasuresbeimposedbyappropriategovernmentagenciesorregulators againstthefinancialinstitutionandcanreferanysuspectedmoneylaunderingtolaw enforcementauthoritiesforfurtherinvestigation.ThePBOCperformsoff sitemonitoring throughperiodicreportsandhasestablishedrequirementsforChinesebankstosubmit suchreports.Inordertoimproveoff-sitesupervisionandmonitoringof largeamountcash transactions,thePBOCdevelopedaninteractiveinformationtechnologysystemforAML/ CFTsupervisionthathasbeeninoperationsinceOctober2010inboththePBOCand financialinstitutions. 24 Chinaalsoisapartytootheragreementsthataddressmoneylaunderingorterroristfinancing,includingthe U.N.ConventionAgainsttheIllicitTrafficofNarcoticsandPsychotropicSubstances,theU.N.Convention AgainstTransnationalOrganizedCrime,theU.N.ConventionAgainstCorruption,andtheU.N.International ConventionfortheSuppressionoftheFinancingofTerrorism. 25 FATF,ChinaMutualEvaluation8thFollow-upReport,Anti-MoneyLaunderingandCombatingtheFinancingof Terrorism(February17,2012),availableatwww.fatf-gafi.org/dataoecd/5/34/49847246.pdf.Thereportnotedthat Chinahasmadesignificantprogresstoaddresstheremainingdeficienciesandhas“reachedasatisfactorylevel ofcompliancewithallsixcoreRecommendationsandeightofthe[ten]keyRecommendations.”Idatpara.41. InoneofthekeyRecommendationswhereChinahasnotattainedasatisfactorylevelofcompliance(implementationofinternationalinstrumentsrelatedtoterroristfinancing),Chinahassubstantiallyaddressedpartof thedeficiencyandcontinuestomakeprogress.WithrespecttotheotherkeyRecommendation(freezingofterrorist-relatedassets),ChinahasmadesignificantprogresssinceJune2011toimproveitsimplementation.In particular,Chinahasimplementedlegislationestablishingalegislativeframeworkandadministrativeauthority forenforcementandhasrespondedtoforeignrequeststofreezeassets.TheFATFwasoftheviewthatChina shouldenactadditionalguidancetoimproveimplementation,andChineseauthoritiesarecurrentlydrafting rulestodoso.Id.atparas.150-52and157-59.
LegalDevelopments:SecondQuarter,2012 299 BOChaspoliciesandprocedurestocomplywithChineselawsandrulesregardingAML. BOCstatesthatithasimplementedmeasuresconsistentwiththerecommendationsof the FATFandthatithasputinplacepolicies,procedures,andcontrolstoensureongoing compliancewithallstatutoryandregulatoryrequirements,includingdesignatingAML compliancepersonnelandconductingroutineemployeetrainingatallBOCbranches. BOC’scompliancewithAMLrequirementsismonitoredbythePBOCandby BOC’sinternalandexternalauditors. Basedonallthefactsof record,theBoardhasdeterminedthattheAMLeffortsbyBOC anditshomecountrysupervisorsareconsistentwithapproval. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsinthiscase.TheCBRC requiresChinesebankstofollowtheBaselICapitalAccordwithcertainenhancements fromtheBaselIICapitalAccord.26Thecapitallevelsof BOCexceedtheminimumlevels thatwouldberequiredundertheBaselICapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldberequiredof aU.S.bankingorganization.Managerial andotherfinancialresourcesof BOCareconsistentwithapproval,andBOCappearsto havetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,BOChas establishedcontrolsandproceduresfortheproposedbranchtoensurecompliancewith U.S.lawandforitsoperationsingeneral.Inparticular,BOChasstatedthatitwillapply strictAMLpoliciesandproceduresatthebranchconsistentwithU.S.lawandregulation andwillestablishaninternalcontrolsystematthebranchconsistentwithU.S.requirementstoensurecompliancewiththosepoliciesandprocedures. WithrespecttoaccesstoinformationaboutBOC’soperations,theBoardhasreviewedthe restrictionsondisclosureinrelevantjurisdictionsinwhichBOCoperatesandhascommunicatedwithrelevantgovernmentauthoritiesregardingaccesstoinformation.BOChas committedtomakeavailabletotheBoardsuchinformationontheoperationsof BOCand anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliance withtheIBA,theBHCAct,andotherapplicablefederallaws.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylaworotherwise,BOCalso hascommittedtocooperatewiththeBoardtoobtainanywaiversorexemptionsthatmay benecessarytoenableitoritsaffiliatestomakesuchinformationavailabletotheBoard. TheBoardalsohasconsultedwiththeCBRCaboutaccesstoinformation.TheCBRChas representedthatitwouldfacilitatetheBoard’saccesstoinformationandhasenteredintoa statementof cooperationwiththeBoardandotherU.S.bankingregulatorswithrespectto thesharingof supervisoryinformation.27Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,theBoardhasdeterminedthatBOC hasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoard mayrequest. Chinahasmadeprogresstowardadoptingasystemof financialregulationforitsfinancial systemtomitigatetherisktofinancialstabilityfromitsbanks.ThePBOC,CBRC,other financialsupervisoryagencies,andotheragenciesinChinahavetakenjointmeasuresto maintainfinancialstability.Chinahasestablishedasystemof preliminaryindicatorsfor monitoringfinancialstability,developedmethodologyandoperationalframeworksfor monitoringfinancialrisks,andpublishedanannualChinaFinancialStabilityReportsince 2005.TheCBRChasestablishedmechanismstocooperatewithsupervisoryauthoritiesin atleast25othercountriesforthesupervisionof cross-borderbanking.Inaddition,the 26 TheCBRCalsorequiresalllarge,internationallyactivebanks,suchasBOC,tohaveaminimumrisk-basedtier 1capitalratioof9percentandtotalcapitalratioof11.5percent.BOC’scapitalratiosexceedtheselevels. 27 SeeMemorandumofUnderstandingbetweentheCBRCandtheBoard,theOfficeoftheComptrollerofthe Currency,andtheFederalDepositInsuranceCorporation,June17,2004.
300 FederalReserveBulletin|December2012 PBOCandCBRCofficiallyjoinedtheBaselCommitteeonBankingSupervisiononbehalf of Chinaandsincetheiraccession,haveactivelyparticipatedintherevisionof theBaselII CapitalAccord,intheformulationof theBaselIIICapitalAccord,andinotherworking groups.Chinaalsoisactiveintheongoingworkof theFinancialStabilityBoard.U.S. bankregulatorsandotherbanksupervisorsinpertinentjurisdictionsparticipatedintwo supervisorycollegeshostedbytheCBRC:oneforICBCin2009andoneforCCBin2011. Moreover,authoritiesintheUnitedStatesandChinathatareresponsiblefortheoversight of auditingservicesforpubliccompaniesareengagedincontinuingdiscussionswith respecttoenhancingcross-bordercooperation,andtheBoardlooksforwardtotimely negotiationof anagreementrelatingtocooperativeactionsbytheseauthorities. TheIBAestablishescriteriathatmustbemetbeforetheBoardcanapprovetheestablishmentof abranchoutsidetheforeignbank’shomestate.BOC’shomestateisNewYork. Undersection5(a)(1)of theIBA,asamendedbysection104of theRiegle-NealInterstate BankingandBranchingEfficiencyActof 1994,28aforeignbank,withtheapprovalof the BoardandtheOfficeof theComptrollerof theCurrency(“OCC”),mayestablishand operateafederalbranchinanystateoutsideitshomestatetotheextentthatanational bankwiththesamehomestateastheforeignbankcoulddosoundersection36(g)of the NationalBankAct.Section36(g),whichpreviouslyauthorizedstatesto“opt-in”tointerstatedenovobranching,wasamendedbysection613of theDodd-FrankWallStreet ReformandConsumerProtectionActtopermitnationalbankstoestablishinterstatede novobranchesnationwide.29TheBoardhasdeterminedthatalltheothercriteriareferred toinsections5(a)(1)and5(a)(3)of theIBA,includingthecriteriainsection7(d)of the IBA,havebeenmet.30Inviewof allthefactsof record,theBoardispermittedtoapprove theestablishmentof aninterstatedenovofederalbranchbyBOCundersection5(a)of theIBA. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBOC,as wellasthetermsandconditionssetforthinthisorder,BOC’sapplicationtoestablisha branchisherebyapproved.TheBoardconditionsitsdecisiononBOCprovidingtothe Boardadequateinformationonitsoperationsandactivitiesaswellasthoseof itsaffiliates todetermineandenforcecompliancebyBOCoritsaffiliateswithapplicablefederalstatutes.Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof BOCoranyof itsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyBOCoritsaffiliateswithapplicablefederal statutes,theBoardmayrequireterminationordivestitureof anyof BOC’soritsaffiliates’ directorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyBOCwiththecommitmentsmadetotheBoardin 28 12U.S.C.§3103(a)(1). 29 12U.S.C.§36(g)(1)(A). 30 Section36(g)oftheNationalBankActandsection5(a)oftheIBArequirethatcertainconditionsofsection44oftheFederalDepositInsuranceAct(“FDIAct”)bemetinorderfortheBoardtoapproveadenovo interstatefederalbranch.See12U.S.C.§36(g)(2)and12U.S.C.§3103(a)(3)(C)(referringtosections44(b)(1), 44(b)(3),and44(b)(4)oftheFDIAct,12U.S.C.§§1831u(b)(1),(b)(3),and(b)(4)).TheBoardhasdetermined thatBOCisincompliancewithstatefilingrequirements.Communityreinvestmentconsiderationsarealsoconsistentwithapproval,asBOC’stwoinsuredNewYorkCitybranchesreceivedaCommunityReinvestmentAct (“CRA”)ratingof“satisfactory”fromtheOCCattheirmostrecentCRAperformanceevaluationdated August18,2008.BOCwasadequatelycapitalizedasofthedatetheapplicationwasfiled,andonconsummationofthisproposal,BOCwouldcontinuetobeadequatelycapitalizedandadequatelymanaged. Inaccordancewithsection5(a)(3)(B)(ii)oftheIBA(12U.S.C.§3103(a)(3)(B)(ii))andsection211.24(c)(3)(i)(B) ofRegulationK(12CFR211.24(c)(3)(i)(B)),theBoardhasconsultedwiththeDepartmentoftheTreasury regardingcapitalequivalency.
LegalDevelopments:SecondQuarter,2012 301 connectionwiththisapplicationandwiththeconditionsinthisorder.31Thecommitments andconditionsreferredtoaboveareconditionsimposedinwritingbytheBoardinconnectionwiththisdecisionandmaybeenforcedinproceedingsunder12U.S.C.§1818against BOCanditsaffiliates. Byorderof theBoardof Governors,effectiveMay9,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,andRaskin. RobertdeV.Frierson DeputySecretaryof theBoard Final Enforcement Decision Issued by the Board IntheMatterof LouisA.DeNaples,AnInstitution-AffiliatedPartyof FirstNational CommunityBancorp,Dunmore,Pennsylvania,andUrbanFinancialGroup,Inc.,Bridgeport, Connecticut FRB Docket No. 09-191-B-I ThisisanadministrativeproceedingpursuanttotheFederalDepositInsuranceAct(“the FDIAct”)inwhichtheEnforcementCounselfortheBoardseeksanorderrequiring Respondent,LouisA.DeNaples,toceaseanddesistfromhisallegedcontinuingviolation of section19of theFDIAct,12U.S.C.§1829. Undersection19,anindividualwhohasagreedtoenterintoapretrialdiversionorsimilar programinconnectionwithcertaincriminalchargesmustseektheBoard’sconsentin ordertocontinueasaninstitution-affiliatedpartyof abankholdingcompany.Here,itis undisputedthatRespondentdidnotseekthatconsentafterheenteredintoanagreementwithastatedistrictattorneywithdrawingchargesof perjuryinexchangeforpromises bytheRespondent,buthedidcontinuetobeaninstitution-affiliatedpartyattwobank holdingcompanies.Respondentarguesthatnoconsentisrequiredandthathemaycontinuetoserveasaninstitution-affiliatedpartybecausethewithdrawalagreementwasnot an“agree[ment]toenterintoapretrialdiversionorsimilarprogram”asthattermis definedundersection19.Asdiscussedbelow,however,theBoarddeterminesthatthewithdrawalagreementdoesconstitutethetypeof programcoveredbysection19,andthatby failingtoseektheBoard’sconsenttohiscontinuedserviceasaninstitution-affiliatedparty, theRespondenthasdeprivedtheBoardof itsstatutorily-mandatedopportunitytoreview whethertopermithiscontinuedinvolvementwiththosecompanies.TheBoardalsorejects otherproceduralandsubstantiveargumentsraisedbyRespondent.Therefore,uponreview of theadministrativerecordandadditionalfilingsmadetotheBoard,theBoardissuesthis FinalDecisionadoptingtheRecommendedDecision(“RecommendedDecision”)of AdministrativeLawJudgeC.RichardMiserendino(the“ALJ”),exceptasmodifiedherein, andorderstheissuanceof theattachedOrdertoCeaseandDesist. 31 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthority oftheOCCtolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplantthe authorityoftheOCCtolicensetheproposedofficeofBOCinaccordancewithanytermsorconditionsthatit mayimpose.
302 FederalReserveBulletin|December2012 I.Statementof theCase A.StatutoryandRegulatoryFramework Anumberof provisionsof theFDIActareimplicatedinthisadministrativeenforcement action.Section19of theFDIAct(“section19”),12U.S.C.§1829,makesitillegalforany persontobecomeorcontinuetobeaninstitution-affiliatedpartywithrespecttoanybank holdingcompany(“BHC”),ownorcontrolaBHC,orparticipateintheconductof the affairsof aBHCwithouttheconsentof theBoardif thatpersonhasbeenconvictedof a criminaloffenseinvolvingdishonestyorabreachof trustormoneylaundering,orhas agreedtoenterintoapretrialdiversionorsimilarprograminconnectionwithsuchan offense.12U.S.C.§1829(a)(1)(A),(d)(1).1Apersonisaninstitution-affiliatedpartyof a bankholdingcompanyif,amongotherthings,heorsheisanofficer,director,employee,or controllingstockholderof theBHC,orhasfiledorisrequiredtofileachangeincontrol noticeundertheChangeinBankControlAct,12U.S.C.§1817(j).12U.S.C.§1813(u), 1818(b)(3)(applyingthepenaltyprovisionsof section1818tobankholdingcompaniesin thesamewayastheyapplytostatememberbanks);InrePharaon,83FederalReserveBulletin347,348n.2(1997). Section8(b)of theFDIAct,12U.S.C.§1818(b),spellsoutthesubstantiverequirements forissuingacease-and-desistorder.Acease-and-desistordermaybeimposedwhenthe agencyhasreasonablecausetobelievethattherespondenthasengagedorisaboutto engageinanunsafeorunsoundpracticeinconductingthebusinessof adepositoryinstitution,orthattherespondenthasviolatedorisabouttoviolatealaw,rule,orregulationor conditionimposedinwritingbytheagency.12U.S.C.§1818(b)(1).Acease-and-desist ordermayrequiretherespondenttotakeaffirmativeactiontheagencydeterminestobe appropriatetocorrectorremedyanyconditionsresultingfromtheviolationorpractice withrespecttowhichsuchorderisissued.12U.S.C.§1818(b)(6)(F).Thepowertoissue cease-and-desistordersincludestheauthoritytoplacelimitationsontheactivitiesof the respondent.12U.S.C.§1818(b)(7). Undersection8(b)andtheBoard’sregulations,theALJisresponsibleforconductingproceedingsonanoticeof chargesrelatingtoaproposedordertoceaseanddesist.12U.S.C. §1818(b).TheALJissuesarecommendeddecisionthatisreferredtotheBoardtogether withanyexceptionstothoserecommendationsfiledbytheparties.TheBoardmakes thefinalfindingsof fact,conclusionsof law,anddeterminationwhethertoissuethe requestedorders.12CFR263.38. Respondentassertsthatanadditionalsectionof theFDIActisrelevanttothisproceeding. Section8(g)of theActsetsforthaseparateprocedureandsubstantivebasisforaddressing certainmisconductbybankofficialsandemployees.Undersection8(g),afederalbanking agencymayissueapre-hearingorderof removalorprohibitionagainstabankofficialor employeeif (1)ajudgmentof convictionoranagreementtoenterapretrialdiversionor othersimilarprogramisenteredagainsttherespondentinconnectionwithcertainspecified crimesoranycrimeinvolvingdishonestyorbreachof trustwhichispunishablebyimprisonmentforatermexceedingoneyear;and(2)continuedserviceorparticipationbythe respondentwouldthreatentheinterestsof depositorsorimpairpublicconfidenceina depositoryinstitution.12U.S.C.§1818(g)(1)(C).Section8(g)(3)setsoutaprocedurefor post-deprivationprocessinthecaseof anorderissuedundersection8(g)(1),inwhichthe respondentmayseektoshowthathisorhercontinuedparticipationintheinstitution’s affairswouldnotposeathreattotheinstitution’sdepositorsorimpairpublicconfidencein 1 Thesameconductisproscribedforinstitution-affiliatedpartiesofinsureddepositoryinstitutionsabsentthe approvaloftheFederalDepositInsuranceCorporation.12U.S.C.§1829(a)(1).
LegalDevelopments:SecondQuarter,2012 303 theinstitution.12U.S.C.§1818(g)(3). B.Facts2 2FirstNationalCommunityBancorp(“FirstNational”),Dunmore,Pennsylvania,and UrbanFinancialGroup,Inc.(“UrbanFinancial”),Bridgeport,Connecticut,areregistered bankholdingcompanies.Respondentiscurrentlychairmanandadirectorof First National,owns10.26percentof itsvotingshares,andisamemberof agroupthatowns approximately19.87percentof itsvotingshares.Respondentisthelargestshareholderof UrbanFinancial,owningapproximately45percentof itsshares.Accordingly,Respondent isaninstitution-affiliatedpartyof bothFirstNationalandUrbanFinancial.12U.S.C. §1813(u). OnJanuary30,2008,theDistrictAttorneyof DauphinCounty,Pennsylvania(“District Attorney”)filedacriminalcomplaintagainstRespondentthatchargedhimwithfour countsof perjuryinconnectionwithtestimonyRespondentgavetothePennsylvaniaGamingControlBoardwhileintheprocessof obtainingagaminglicenseforacasinohe owned.Respondenttookaleaveof absencefromhispositionaschairmananddirectorof FirstNationalshortlyafterthechargeswerefiledandtodateremainsonleaveof absence. OnApril15,2009,aftermonthsof negotiations,RespondentandtheDistrictAttorney enteredintoanAgreementforWithdrawalof Charges(“WithdrawalAgreement”).Under thewrittentermsof theAgreement,theDistrictAttorneyagreedtowithdrawallof the criminalchargesbutreservedtherighttoreinstatethechargesuponamaterialbreachof anytermof theWithdrawalAgreementbyRespondent.Respondentinturnagreed,among otherthings,totransferhisinterestinthecasinotoatrustforthebenefitof hisdaughter, transfertothetrustanyprofitsaccruedinthecasinoduringtheperiodof suspensionof his gaminglicense,paythecostof prosecution,andprovidequarterlyreportstotheDistrict AttorneyregardinghiscompliancewiththeWithdrawalAgreementfortwoyearsfollowing execution.BasedontheWithdrawalAgreement,theBoardinitiatedthisenforcementproceedingagainstRespondent. FollowingtheALJ’sissuanceof hisRecommendedDecision,theCourtof CommonPleas of DauphinCounty,Pennsylvania,atRespondent’srequest,issuedtwoOrdersrelevantto thismatter.Thefirst,issuedMay18,2011(“ExpungementOrder”),wasaformorderprovidingthatRespondent’s“arrestrecordregardingthesechargesshallbeexpunged”and directing“allcriminaljusticerecordsuponwhomthisorderisserved”to“expungeand destroy”documentspertainingtotheproceedings.TheExpungementOrderdidnotmentiontheWithdrawalAgreement.Thesecond,issuedSeptember19,2011(“Clarifying Order”),“clarified”thepriororderbystating,inpart:“EncompassedwithintheExpungementOrderwastheAgreementforWithdrawalof Charges(‘WithdrawalAgreement’). Sinceithasbeencompletelyandforeverexpunged,theWithdrawalAgreementisof no forceoreffect.” C.ProceduralHistory OnNovember23,2009,theBoardissuedaNoticeof Chargesandof HearingIssuedPursuanttosection8(b)of theFDIAct(“Notice”)allegingthatRespondenthadnotsought orreceivedtheBoard’spermissiontocontinuetobeaninstitution-affiliatedpartywithin themeaningof section19(a)(1)(A)(ii),despitethefactthatheenteredintoapretrialdiver- 2 Exceptwherespecificallynoted,thestatedfactsareundisputedbytheparties.SeeEnforcementCounsel’s StatementofMaterialFactsNotinDispute(“FRBSOF”),filedMarch25,2010,andRespondent’sStatement ofUndisputedMaterialFacts(“Resp.SOF”),filedApril5,2010.
304 FederalReserveBulletin|December2012 sionagreementtoresolvecriminalcharges.TheNoticesoughtacease-and-desistorder requiringRespondenttoresignhispositionasdirectorof FirstNationalandsubmitan acceptableplantotheBoardforthepromptdivestitureof hiscontrollingshareholdingsin FirstNationalandUrbanFinancial.3RespondenttimelyfiledananswertotheNotice, admittingthatheisthechairman(albeitonaleaveof absence)of FirstNational;thathe owns10.26percentof thevotingsharesof FirstNationalandhasbeenamemberof acontrolgroupthatfiledanoticeof changeinbankcontrolwiththeFederalReserve;andthat heowns45percentof thevotingsharesof UrbanFinancial.Respondentfurtheradmitted thathehasnotsoughtorreceivedtheBoard’spermissiontobeaninstitution-affiliated partyof FirstNationalorUrbanFinancialafterenteringintotheagreement.Respondent deniedthathehasviolatedsection19,assertingthattheagreementintowhichheentered wasnota“pretrialdiversionorsimilarprogram”withinthemeaningof section19. OnFebruary12,2010,EnforcementCounselfiledaMotiontoStrikeRespondent’s RequestforProductionof Documents.Respondent’sproductionrequesthadgenerally soughtdiscoveryconcerningwhetherRespondent’scontinuedparticipationinFirst NationalandUrbanFinancialwouldcauseharmtotheinstitutions.TheALJgranted EnforcementCounsel’sMotiontoStrikeonthegroundsthatdiscoveryconcerningharmto thefinancialinstitutionswasnotmateriallyrelevanttoaproceedingbroughtundersection8(b). EnforcementCounselandRespondenteachfiledmotionsforsummarydispositionaccompaniedbystatementsof materialfactsnotindispute.OnJuly23,2010,Respondentfileda MotionforLeavetoFileaNoticeof SupplementalAuthorityinSupportof hisCross-MotionforSummaryDispositionandthecorrespondingNoticeof SupplementalAuthority (“FirstNoticeof SupplementalAuthority”),whichwasdeniedbytheALJonAugust11, 2010. OnFebruary18,2011,theALJissuedaRecommendedDecisionadvisingthatEnforcementCounsel’sMotionforSummaryDispositionbegrantedandthatRespondent’sCross- MotionforSummaryDispositionbedenied,andrecommendingtheissuanceof thecease and-desistorderagainstRespondent.4Respondentsubsequentlyfiledexceptionstothe ALJ’sRecommendedDecisionandthematterwasreferredtotheBoardforfinaldecision. See12CFR263.38-39.OnMarch29,2011,theBoardissuedanoticeacknowledgingthat thecompleterecordof thematterhadbeensubmittedtotheBoard.See12CFR263.40. Nonetheless,onApril4,2011,RespondentfiledwiththeBoardaRequesttoReopenthe RecordandNoticeof SupplementalAuthorityinSupportof hisExceptions(“Second Noticeof SupplementalAuthority”),whichwasopposedbyEnforcementCounsel.On April27,2011,RespondentfiledaReplyinSupportof Noticeof SupplementalAuthority (“ThirdNoticeof SupplementalAuthority”)whichcontainedfurthernewdocumentary evidenceinsupportof Respondent’sexceptions.EnforcementCounseldulyopposedthat supplementalfilingaswell.OnMay25,2011,RespondentfiledaMotionforImmediate Dismissalof CeaseandDesistProceedingsbasedontheissuanceof astatecourtorder grantinghispetitionforexpungementof hiscriminalrecord(“FirstMotionforImmediate 3 OnNovember24,2009,theOfficeoftheComptrolleroftheCurrency(“OCC”)issuedasubstantiallysimilar NoticeofChargesseekingacease-and-desistorderrequiringRespondent’sresignationfromhispositionas chairmananddirectorofFirstNationalCommunityBank(“Bank”).InhisRecommendedDecision,theALJ consolidatedtheproceedingsfortheBoard’sNoticeandtheOCC’sNoticeofCharges.OnMarch23,2012,the OCCenteredorderrequiringRespondenttoceaseanddesistfromhiscontinuingviolationofsection19, includingbyresigningfromallpositionsthatheholdsasaninstitution-affiliatedparty. 4 TheALJ’sRecommendedDecisionalsorecommendedthattheOCCgranttheOCCEnforcementCounsel’s motionforsummarydispositionandissuetheOCCEnforcementCounsel’srequestedcease-and-desistorder. Asnotedearlier,theOCCissueditsfinaldecisionadoptingthisrecommendationonMarch23,2012.
LegalDevelopments:SecondQuarter,2012 305 Dismissal”).ThiswasfollowedbyasecondMotionforImmediateDismissalof Ceaseand DesistProceedingsbasedonaclarificationof thestatecourtexpungementorder(“Second MotionforImmediateDismissal”).EnforcementCounselopposedbothmotions.Despite thefactthatthesevariousfilingsweremadeaftertheBoardnotifiedpartiesthattherecord wasclosed,theBoardhasconsideredtheminitsfinaldecision. II.Discussion ThisproceedingraisesseveralnovelissuesfortheBoard.First,theBoardmustconsider Respondent’sargumentthatacease-and-desistproceedingundersection8(b)of theFDI Actisimproperprocedurally,andthattheonlywaytheBoardcouldobtaintherelief soughtwouldhavebeentoproceedundersection8(g).Second,theBoardmustdecide whetherbyenteringintotheWithdrawalAgreement,Respondententeredintoa“pretrial diversionorsimilarprogram”withinthemeaningof section19of theFDIAct.Finally, theBoardmustaddresstheeffectof theExpungementOrderandtheClarifyingOrderon thatdetermination. Mostof theseissueswereraisedbeforetheALJ,5whorecommendedissuanceof acease and-desistorderagainstRespondentundersection8(b)basedonRespondent’sviolations of section19.6TheALJ’srecommendeddecisionheldthattheBoardhadauthoritytoproceedundersection8(b)toaddressviolationsof section19.ItalsoheldthattheWithdrawal Agreementwasa“pretrialdiversionorsimilarprogram”undersection19,andthatstate lawdidnotgoverntheinterpretationof thatphrase.Forthereasonssetforthbelow,the BoardaffirmstheALJ’srecommendeddecisionanddeterminesthatthesubsequent expungementof Respondent’scriminalrecorddoesnotdivesttheBoardof authorityto proceedtoremedyaviolationof section19.TheBoardthereforeissuestheattachedceaseand-desistorderagainstRespondent. A.TheBoardmayenforceSection19throughacease-and-desistproceedingunder Section8(b) Undersection8(b),theBoardhastheauthoritytoserveonaninstitution-affiliatedparty withinitsregulatoryjurisdictionanoticeof chargesseekingacease-and-desistorderif,in theBoard’sopinion,theinstitution-affiliatedparty“isviolatingorhasviolated...alaw.” 12U.S.C.§1818(b)(1).Inthepresentcase,afterRespondententeredintotheWithdrawal Agreement,theBoardinitiatedanoticeof chargesagainstRespondentbecauseitbelieved Respondentwasviolatingsection19of theFDIActbycontinuing,withouttheconsentof theBoard,tobeaninstitution-affiliatedpartyof FirstNationalandUrbanFinancialafter enteringintoapretrialdiversionorsimilarprogram.Section19is“alaw”and,moreover,is withinthesamestatuteassection8(b).Thestatutorylanguagethusclearlysupportsthe Board’sauthoritytopursueacease-and-desistorderundersection8(b)toremedyaviolationof section19. Despitetheapparentlyclearstatutorylanguage,Respondentcontendsthatsection8(b)cannot beusedtoenforcesection19becauseheclaimsthatsection19isonlyacriminalstatute. Respondentalsoarguesthat,totheextenttheBoardcanaddresstheinvolvementinbankingof anindividualwhoentersintoa“pretrialdiversionorothersimilarprogram,”Sec- 5 TheALJdidnotaddresstheeffectoftheExpungementOrderortheClarifyingOrder,whichwereissuedafter theissuanceoftheRecommendedDecision. 6 Respondentdidnotargue,eitherbeforetheALJorinhisExceptions,thathewasnotaninstitution-affiliated partyofFirstNationalorofUrbanFinancialorthathisWithdrawalAgreementwasnotenteredintoinconnectionwithaprosecutionforanoffenseinvolvingdishonestywithinthemeaningofsection19(a)(1).Accordingly,theseissuesarewaived.12CFR263.39(b).
306 FederalReserveBulletin|December2012 tion8(g)governsbecauseitismorespecificthansection8(b)andbecauseusingsection8(b)for thispurposeessentiallyrendersthebankofficerremovalprovisionof section8(g)superfluous.RespondentcitesFeinbergv.FDIC,420F.Supp.109(D.D.C. 1976),toarguethatonlysection8(g)canbeusedforremovalbecauseitprovidesconstitutionallyguaranteedsubstantiveandproceduralsafeguardsthatarelackinginsection8(b). Respondent’sfirstargumentfailsbecausethestructureof section19aloneshowsthatitis notpurelyacriminalstatute,andbecause,evenif itwere,itwouldsupportanadministrativeenforcementactionundersection8of theFDIAct.Subsection19(a)(1)prohibitscertainconduct,includingserving,withouttheappropriateregulator’sconsent,asaninstitution-affiliatedpartyafteragreeingtoenterintoapretrialdiversionorsimilarprogram relatedtoacrimeof dishonesty.12U.S.C.§1829(a)(1).Subsection19(b)createsacriminal penaltyfor“[w]hoeverknowinglyviolatessubsection(a).”12U.S.C.§1829(b)(emphasis added).Whilethestatutethusprovidesthatasubsetof theconductprohibitedinsubsection19(a)(1),namely“knowing”violations,maybecriminallypunished,thisbynomeans limitsthebreadthoradministrativeenforceabilityof theprohibitioncontainedinsubsection19(a)(1).Moreover,evenassumingsection19werepurelyacriminalstatute,section8(b)allowsfortheBoardtorequirecompliancewithitthroughacease-and-desistproceedingundersection8(b).SeeCousinv.OTS,73F.3d1242,1251(2dCir.1996)(criminal briberychargeissufficienttosupportremovalundertheanalogousprovisionof theHome Owners’LoanAct). Respondent’ssecondargumentisbasedonwhatheseesasaconflictbetweensection8(g)of theFDIAct,whichsetsforthaprocedureforsuspensionorprohibitionof institution-affiliatedpartiesinvolvedincertaincrimes,andtheapproachtakenbyBoardEnforcement Counselhere,whichusedthemoregeneralauthorityinsection8(b)of theFDIActtoissue acease-and-desistorderforaviolationof section19of thatAct,whichinturnrefersto similarcrimes.Inshort,RespondentarguesthattheBoardmaynotusesection8(b)to removeRespondentfromhisposition,butmayonlyusetheproceduressetforthinsection8(g);toholdotherwise,arguesRespondent,wouldrendersection8(g)superfluous.In supportof thisargument,Respondentcitesageneralcanonof statutoryinterpretation whichstates“[w]henbothspecificandgeneralprovisionscoverthesamesubject,thespecificprovisionwillcontrol,especiallyif applyingthegeneralprovisionwouldrenderthe specificprovisionsuperfluous.”NorwestBankMinn.Nat.Ass’nv.FDIC,312F.3d447, 451(D.C.Cir.2002).Respondent’sargumentfails,however,becausesection8(g)andsection19donot“coverthesamesubject.”Section19coverscasesinwhicharespondenthas beenconvictedof,orhasagreedtoenterapretrialdiversionorsimilarprograminconnectionwithaprosecutionfor,anycrimesinvolving“dishonestyorabreachof trustor moneylaundering.”Bycontrast,section8(g)limitsitsreferencetocrimesof dishonestyor breachof trusttothosecrimespunishablebyimprisonmentof atleastayear. Additionally,asRespondentcorrectlynotes,section8(g)callsfordifferentproceduresthan section8(b).Thisdifferenceinproceduresdoesnot,however,makeitimpermissiblefor EnforcementCounseltoproceedundersection8(b),asRespondentargues.Rather,solong astheproceduresprovidedforineachsubsectioncomplywithconstitutionalstandardsof dueprocess,thedecisiononhowtoproceedisentirelywithinthediscretionof theBoard.7 Feinberg,citedbyRespondent,doesnotsuggestotherwise.Inthatcase,thedistrictcourt 7 Respondentarguesthatthepermissiveterm“may”insection8(b)(providingthatifaninstitution-affiliated party“isviolating...alaw,”theagency“mayissue...anoticeofcharges”inrespectthereof)meansonlythat “whileEnforcementCounselcandecidewhethertobringanactiontoremoveabankingofficial,suchan action,ifpursued[,]mustbeprosecutedundersection8(g).”Respondent’sBriefinSupportofExceptionsat 11.Thereisnothinginthestatutorylanguageofsection8(b)thatcompelsorevenpermitsthisinterpretation, andtheBoarddeclinestoadoptit.
LegalDevelopments:SecondQuarter,2012 307 struckdownondueprocessgroundsanearlierversionof section8(g)(notsection8(b)) becauseitdidnotprovideforanyhearing,eitherbeforeorafterissuanceof aprohibition order,substantiallylimitedjudicialreview,andwouldlikelyresultinapermanentlossof propertyof theindividualbeingsuspended.Feinberg,420F.Supp.at112,119-21.Butsection8(b),underwhichEnforcementCounselproceeded,alreadyhasallof theconstitutionalprotectionsidentifiedbytheFeinbergcourt,soFeinbergprovidesnobasisforchallengingEnforcementCounsel’schoiceof enforcementmechanism.8Moreover, section8(b)providesforapre-deprivationnoticeandhearing,ratherthanthepost-deprivationmechanismprovidedinsection8(g),sofromaconstitutionalstandpointitsprotectionsareevengreater.See12U.S.C.§1818(b)(1),(h). Respondentmakesmuchof thefactthatsection8(g)describesanadditional“harm”factor asnecessarytoremoveaninstitution-affiliatedparty,whileneithersection19norsection8(b)containssucharequirement.9However,Congresscouldreasonablyhavedecided, astheFDIActindicates,thatbeforeinitiatinganactionundersection8(g)todeprivean individualof hisorherpositionwithoutapriorhearing,thebankingagenciesmusthavea stronginterestinproceeding,basedonthepotentialforharmtothepublicinterest.This heightenedharmrequirementactsasacheckonanagency’sabilitytoremoveindividuals withoutapriorhearingexceptwherethepublicinterestisatitshighest.Incontrast,a cease-and-desistorderundersection8(b)servesoccasionswheretheagencydeterminesitis unnecessarytoactagainstanindividualimmediatelyandchoosestoprovidepre-deprivationproceduresinstead.Thismaybebecausetheagencyseeslessimmediateharm,suchas when,ashere,theinstitution-affiliatedpartyhasalreadytakenaleaveof absencefromhis bankingpositions.Ratherthanrenderingsection8(g)superfluous,theprovisionsof section8(b)simplyprovideadifferenttoolforagenciestouseundercertaincircumstances wheretheagencydecidesitismoreappropriate.ThefactthatEnforcementCounselavailed itself of oneenforcementtooloveranotherisnotimpermissible. Moreover,theBoard’sdecisiontousethepre-deprivationhearingproceduresof section8(b),whichunlikesection8(g)doesnotcontainanexplicitharmstandard,doesnot negatethestrongpublicinterestinrequiringagencyreviewbeforeanindividualwithahistoryof crimesinvolvingdishonestyorbreachof trustispermittedtocontinueasaninstitution-affiliatedparty.Congress,byprohibitingsuchinvolvementabsentagencyapproval, hasalreadydeterminedthatindividualswhoseconductisamongtheoffenseslistedin section19causecontinuingharmtothepublicconfidenceinfinancialinstitutions.Because undersection8(b)theindividualhasanopportunitytochallengethebasisforacease-anddesistorderbeforeitisissued,theagencyneednotmakeaspecialshowingof harmbeyond thefactthattherequirementsof section19havebeenmet.AsFeinbergnoted,“[t]hefundamentalrequisiteof dueprocessof lawistheopportunitytobeheard.”420F.Supp.at 119(quotingGrannisv.Ordean,234U.S.385,394(1914)).Inreviewingsection8(b)and 8 Section8(g)hassincebeenamended,andtheSupremeCourthasfoundittobeconstitutionallysound.See FDICv.Mallen,486U.S.230,248(1988). 9 TheBoardnotesthatRespondentappearstomisconstruesection8(g)bysuggestingtheBoardmustshow harmtotheinstitutionorthepublicinordertoremoveanindividualundersection8(g).Section8(g)actually placestheburdenonrespondentstodisproveharm.TheBoardmustinitiallydeterminethatanindividual’s continuedserviceasaninstitution-affiliatedpartywouldcauseharmbeforeissuingaprohibitionnotice,butto challengethisnotice,therespondentmust“showthatthecontinuedservicetoorparticipationintheconductof theaffairsofthedepositoryinstitutionbysuchpartydoesnot,orisnotlikelyto,poseathreattotheinterests ofthebank’sdepositorsorthreatentoimpairpublicconfidenceinthedepositoryinstitution.” 12U.S.C.§1818(g)(1)(A),(3).
308 FederalReserveBulletin|December2012 theBoard’sregulations,andhowtheywereappliedintheseproceedings,theBoardseesno reasontofindRespondenthasbeendeniedhisconstitutionalrighttobeheard.10 B.TheWithdrawalAgreementasexecutedisanagreement“toenterintoapretrialdiversion orsimilarprogram.” RespondentassertsthattheALJerredinfindingthatRespondent“agreedtoenterintoa pretrialdiversionorsimilarprogram”withinthemeaningof section19whenhesignedthe WithdrawalAgreement.See12U.S.C.§1829.Section19doesnotdefine“pretrialdiversion orsimilarprogram.”Respondentcontendsthatstatelawshouldgovernthisquestion,and thatunderthelawof PennsylvaniatheWithdrawalAgreementdoesnotconstituteapretrialdiversionprogram. RespondentarguesinthisregardthattheBoardmustfollowtheinterpretationinthe FDICStatementof Policyforsection19of theFDIAct(“FDICPolicyStatement”).See www.fdic.gov/regulations/laws/rules/5000-1300.html.ThatPolicyStatementprovidesin partthat“[w]hetheraprogramconstitutesapretrialdiversionisdeterminedbyrelevant federal,state,orlocallaw,andwillbeconsideredbytheFDIConacase-by-casebasis.” TheFDICPolicyStatementis,however,justthat—astatementof policyof theFDIC.It isnotlegallybindingonanyparty(save,perhaps,fortheFDICitself),seeCtr.forAuto Safetyv.NHTSA,452F.3d798,807(D.C.Cir.2006)(generalstatementsof policy“neither determinerightsorobligationsnoroccasionlegalconsequences”).Inanycase,theFDIC PolicyStatementiscertainlynotbindingontheBoard,whichhassoleinterpretiveand policyauthorityoversection19withrespecttobankholdingcompanies.11TheBoardhas neverformallyadoptedtheFDICPolicyStatementoranyotherpolicyinterpreting“pretrialdiversionorsimilarprogram”insection19.Therefore,theBoardisnotboundbythe FDICPolicyStatementandmayexerciseitsownauthoritytointerprettheterm. ThoughnotauthoritativefortheBoard,theFDICPolicyStatementcontainsauseful descriptionof featuresthataregenerallypartof apretrialdiversionorsimilarprogram.12 TheBoardtakesasimilarviewandwilllookfortwocharacteristicsindeterminingwhether anagreementtoenterapretrialdiversionorsimilarprogramexists:theagreementprovides for(1)asuspensionoreventualdismissalof chargesorcriminalprosecution,and(2)avoluntaryagreementbytheaccusedtotreatment,rehabilitation,restitutionorothernoncriminalornonpunitivealternatives.Thisisinlinewiththe“ordinary”meaningsof theterm discussedintheRecommendedDecision. Inmakingthisdetermination,theBoardisnotbound,asRespondenthasasserted,tofollowstateorlocallawdefinitionsof “pretrialdiversion.”SeeTaylorv.UnitedStates, 495U.S.447,451(1990)(absentaplainindicationtothecontrary,federallawsarenotconstruedsothattheirapplicationdependsonstatelaw)(citingDickersonv.NewBanner Institute,Inc.,460U.S.103,119-120(1983);MississippiBandof ChoctawIndiansv.Holyfield,490U.S.30,43(1989).Thephrase“pretrialdiversionorsimilarprogram”isfoundin 10 Asarelatedmatter,theBoardalsoaffirmstheALJ’sOrderGrantingMotiontoStrikeProductionofDocuments.Respondenthadsoughtdiscoveryrelatedtotheharmtotheinstitutionposedbyhisremainingasa director.Forthereasonsdiscussedabove,theALJwascorrectinrulingsuchdiscoverywasnotrelevanttothis matter. 11 SeeCollinsv.NTSB,351F.3d1246,1254(D.C.Cir.2003)(whereexpertenforcementagencieshavemutually exclusiveauthorityoverseparatesetsofregulatedpersons,eachexpertagencyisentitledtodeferenceinits interpretationofthestatute).Section19issuchastatute,withtheFDIChavingexclusiveauthorityoverparticipationininsureddepositoryinstitutions,andtheBoardhavingexclusiveauthorityoverparticipationin bankholdingcompaniesandsavingsandloanholdingcompanies. 12 TheFDICPolicyStatementstatesthatapretrialdiversionorsimilarprogram“ischaracterizedbyasuspension oreventualdismissalofchargesorcriminalprosecutionuponagreementbytheaccusedtotreatment,rehabilitation,restitution,orothernoncriminalornonpunitivealternatives.”63FederalRegister66184-85.
LegalDevelopments:SecondQuarter,2012 309 afederalstatutesettingstandardstobeappliedbyfederalbankingagenciesregardingpartieswhomaybeassociatedwithfederally-regulateddepositoryinstitutionsandholding companies.Byrequiringpriorconsent,section19ensuresthattheBoard,asthefederalregulatorof bankholdingcompanies,hasanopportunitytoscrutinizeindividuals whencertainconduct—includingtheindividualagreeingtoenterintoapretrialdiversion orsimilarprogram—hasoccurred,andmakeajudgmentastothebenefitsandrisksof theircontinuedinvolvementinbanking.Statelawdefinitionsof “pretrialdiversion”arenot meanttoaddressthisconcern.Thus,thephrasemustbeinterpretedasamatterof federallaw. However,stateorlocallawmayberelevantinsomecircumstances.Forexample,aprogram referredtobystateauthoritiesasa“pretrialdiversion”programwouldlikelymeetthecharacteristicsof apretrialdiversionorsimilarprogramundersection19.Nonetheless,theterminologyusedbyastate—orthepartiestoanagreement–isnotdispositiveof whethera programisa“pretrialdiversionorsimilarprogram”asthatphraseisusedinsection19. Accordingly,Respondent’scontentionthatonlystatelawdefinitionsshouldgovernthe Board’sinterpretationof section19isrejected. Similarly,Respondent’scontentionthattheparties’subjectiveintentgovernsisalso rejected.Underfederalcommonlawof contracts,althoughtheparties’intentisthe“paramountgoal”inconstruingacontract,“[c]ourtsaretoconsider‘nottheinner,subjective intentof theparties,butrathertheintentareasonablepersonwouldapprehendinconsideringtheparties'behavior.’”Baldwinv.Univ.of PittsburghMed.Ctr.,636F.3d69,75(3d Cir.2011)(quotingAm.EagleOutfittersv.Lyle&ScottLtd.,584F.3d575,582(3dCir. 2009)).Thewordsof acontract“clearlymanifesttheparties’intentif theyarecapableof onlyoneobjectivelyreasonableinterpretation.”Baldwin,636F.3dat76.Moreover,the resultswouldnotdifferunderPennsylvanialaw.SeeMellonBank,N.A.v.AetnaBusiness Credit,Inc.,619F2.d1001,1009-10(3dCir.1980)(quotingBestv.RealtyManagement Corp.,101A.2d438,440(Pa.Super.1953))(findingthatPennsylvaniacourtsdonotpsychicallydelveintothemindsof theparties;rather,“[w]henawrittencontractisclearand unequivocal,itsmeaningmustbedeterminedbyitscontentsalone.”). Inthiscase,theWithdrawalAgreementunequivocallystatesthattheDistrictAttorney wouldwithdrawchargesagainstRespondentbutretainedtherighttoreinstatecharges uponmaterialbreachof anytermof theWithdrawalAgreementbyRespondent.See Answer¶910,Resp.SOF¶11.Inexchange,Respondentwasrequiredtotransferhisownershipinterestinhiscasinotohisdaughter,transferanyprofitsthataccruedfromthe casinotohisdaughter’strust,providequarterlyreportstotheDistrictAttorneyregarding hiscompliancewiththeWithdrawalAgreement,andpaythecostof theprosecutionof the case.SeeResp.SOF¶13.Thus,theWithdrawalAgreementonitsfacecontainsthecharacteristicsof anagreementtoenterapretrialdiversionorsimilarprogram:theDistrict AttorneywithdrewcriminalperjurychargesagainstRespondentconditionedonRespondentagreeingtocertainnoncriminalalternatives.Notwithstandinganysubjectiveintentthe signatoriesmayhavehad(orhavenow)toavoidimplicationof section19,thetermsof the WithdrawalAgreementconstituteanagreementtoenterapretrialdiversionorsimilar program. Asanadditionalmatter,RespondenthasexceptedtotheALJ’sdenialof hisFirstNoticeof SupplementalAuthority,whichprofferedevidencemeanttoshowtheRespondentdidnot admitguilttothechargesunderlyingtheWithdrawalAgreementandthattheclaimslacked
310 FederalReserveBulletin|December2012 prosecutorialmerit.13TheBoardagreeswiththeALJthatthisevidencewouldnotaidin thedeterminationof whethertheWithdrawalAgreementconstitutesanagreementtoenter apretrialdiversionorsimilarprogram.ContrarytoRespondent’sassertions,anadmission of guiltisnotastandardprerequisiteforallpretrialdiversionprograms.SeeNational Associationof PretrialServicesAgencies,PerformanceStandardsandGoalsforPretrial Diversion/Intervention,StandardCommentarytoStandard4.4,p.13(Nov.2008)(hereinafter“NAPSAStandards”)(“Thosepotentialparticipantswhomaintaintheirinnocence shouldnotbedeniedenrollment[inapretrialdiversion]if,afteranopportunitytoconsult withcounsel,theymakeaninformeddecisiontotakethediversionoption.”).Thus,evidencethatRespondentdidnotadmitguiltwouldnotraiseadisputeastowhetherthe WithdrawalAgreementwasanagreementtoenterintoapretrialdiversionorsimilarprogram. Respondent’sargumentthattheWithdrawalAgreementcouldnotbeapretrialdiversionor similarprogrambecausecasesthatlackprosecutorialmeritcannotbefunneledintopretrial diversionorsimilarprogramsisalsorejected.SeeRespondentDeNaples’Noticeof SupplementalAuthorityinSupportof HisCross-MotionsforSummaryJudgmentat4-5; seealsoNAPSAStandards,Standard1.4(“Allcasesconsideredforpretrialdiversion/ interventionshouldhaveprosecutorialmerit.”).TheWithdrawalAgreementonitsface indicatesthattheDistrictAttorneyagreedtowithdrawchargesbaseduponRespondent’s agreeingtothetermsthereinandwiththeexplicitunderstandingthattheDistrictAttorney couldrefilechargesif RespondentmateriallybreachedtheWithdrawalAgreement.This alonesuggeststhattheDistrictAttorneydidnotconsiderthecasetolackprosecutorial merit.Cf.NAPSAStandards,CommentarytoStandard1.4(“Oneof theunderpinningsof diversionisthatif defendantfailstocomplywiththeprogram,heorshewillbereturnedto thecourtforprosecution.”).WhileRespondent’sevidencemayberelevantinevaluatinga requestforconsentfiledwiththeBoardundersection19,shouldRespondentchooseto submitone,itisnotrelevantindeterminingwhethertheWithdrawalAgreementisan agreementtoenterintoapretrialdiversionorsimilarprogramandwhetherRespondentis thereforerequiredbysection19tofilesucharequestbeforecontinuingasaninstitution-affiliatedpartyof abankholdingcompany,whichisthesubjectof thisproceeding.14 Accordingly,theALJdidnoterrinexcludingRespondent’sevidence. Forthereasonsdiscussedabove,theBoardfindsthatbyenteringtheWithdrawalAgreement,Respondent“agreedtoenterintoapretrialdiversionorsimilarprogram”withinthe meaningof section19.15 13 TheevidencesubmittedwiththeFirstNoticeofSupplementalAuthorityconsistsoffilingsinthematterof UnitedStatesv.D’EliabeforetheUnitedStatesDistrictCourtfortheMiddleDistrictofPennsylvania. Respondentwasnotapartytothismatter,whichconcernedwhetherMr.D’Eliacouldreceiveareductionof hiscurrentsentencebasedoninformationheprovidedregardingthecriminalchargesagainstRespondentthat arethebasisforthesection19violation.InhisFirstNoticeofSupplementalAuthority,Respondentciteslanguageinanorderbythedistrictcourtwhichstatesinasummaryoffactsthatthecriminalchargesagainst Respondentwerewithdrawnwithnoadmissionofguilt.Respondentalsoreferstolanguageinthegovernment’smotionforreductionofsentencethathearguesindicatestheprosecutorwithdrewthecaseagainsthim becauseitwasnon-meritorious. 14 Moreover,contrarytoRespondent’sassertions,theevidencehepresentedtotheALJdoesnotindicatethatthe DistrictAttorney’scaselackedprosecutorialmerit.SeeFirstNoticeofSupplementalAuthority,Ex.B.The evidenceisequivocalatbest.Itconsistsofamotionforsentencereductionfiledinamattertowhichneitherthe RespondentnortheDistrictAttorneywasaparty.Moreover,althoughthemotionstatesatonepointthatthe “DistrictAttorneydecidedthecasecouldnotbesuccessfullyprosecuted,”thebasicpurposeofthemotionisto arguethatadifferentdefendant’ssentenceshouldbereducedbecauseinformationthatthedefendantprovided wasinstrumentalinhelpingtheDistrictAttorneysecuretheWithdrawalAgreementagainstRespondent. 15 Forthereasonsdiscussedabove,theBoardalsorejectsRespondent’sclaimthathewasinappropriatelydenied oralargumentandanevidentiaryhearingbeforetheALJ.BecauseRespondentdidnotdenytheexistenceor validityoftherelevanttermsoftheWithdrawalAgreement,theALJcorrectlydeterminedthatadditionalevi-
LegalDevelopments:SecondQuarter,2012 311 C.Respondent’sPost-RecordNoticesof SupplementalAuthorityandMotionsforImmediate Dismissal AftertheBoardnotifiedpartiesthattherecordof theseproceedingswascomplete, Respondentmadetwofilingsseekingtoreopentherecordtoincludeadditionalaffidavits andothermaterials:theSecondandThirdNoticesof SupplementalAuthority.HesubsequentlysubmittedtwoseparateMotionsforImmediateDismissal,towhichEnforcement Counselresponded.TheBoardhasconsideredthesefilingsandforthereasonsdiscussed belowrejectsRespondent’ssubmissionsof additionalmaterialfortherecord,anddenies hismotionsforimmediatedismissal. First,Respondenthasnotadequatelyexplainedwhyhedidnotraisetheissuespresentedin thesesupplementalfilingsintheproceedingsbelow.Respondentcontendsthat“herepeatedlypressedforahearingandtheopportunitytopresenttheaffiants’livetestimony”and only“learnedthathewouldnotreceivethehearingtowhichhewasentitled”whenthe ALJissuedhisRecommendedDecision.ThirdNoticeof SupplementalAuthorityat3. However,Respondentdoesnotexplainwhytheaffidavitsandothermaterialswerenotpresentedinsupportof hisCross-MotionforSummaryDispositionandOppositiontothe FRB’sMotionforSummaryDisposition.UndertheBoard’srules,motionsandoppositionsforsummarydisposition“mustbesupportedbydocumentaryevidence,whichmay taketheformof ...affidavitsandanyotherevidentiarymaterialsthatthemovingparty contendssupporthisorherposition.”12CFR263.29.Respondentcannotnowcomplain thathedidnothaveanopportunitytopresentthesematerialsmerelybecausehedidnot receiveahearing.16 Moreimportantly,noneof thematerialsprovidedwiththeSecondandThirdNoticeof SupplementalAuthorityarerelevanttotheseproceedings.TheexhibitstotheSecond Noticeof SupplementalAuthorityandExhibitsAandCtotheThirdNoticeof SupplementalAuthorityaimatestablishingthesubjectiveintentof thepartiestotheWithdrawal Agreement.17However,asexplainedabove,theparties’subjectiveintentisnotrelevantto interpretinganunequivocalagreement. InRespondent’sThirdNoticeof SupplementalAuthority,hefurtherarguesthattheprofferedSupersedingAddendumtoAgreementforWithdrawalof Charges(“Superseding Addendum”)isdispositiveevidencebecauseitostensiblymakesitsprovisionsretroactiveto theeffectivedateof theWithdrawalAgreementandstates“[t]herearenoprohibitionsor denceorahearingwerenotnecessarytodecidewhethertheWithdrawalAgreementwasanagreementtoenter intopretrialdiversionorsimilarprogram.Forthesamereasons,theBoarddeniesRespondent’srequestfororal argumentatthisstageoftheproceedings. 16 TheBoardobservesthattheaffidavitscontainedintheFirstandSecondNoticeofSupplementalAuthority wereonlyobtainedaftertheALJissuedhisRecommendedDecision.Theaffidavitsrelateprimarilytothe negotiationandsigningoftheWithdrawalAgreementthatoccurredin2008and2009,however,andthereisno reasongivenforRespondentfailingtoobtaintheseaffidavitsearlierduringtheproceedingsbelowifheconsideredthemtoberelevant. 17 ExhibitAofRespondent’sSecondNoticeofSupplementalAuthorityandExhibitCofRespondent’sThird NoticeofSupplementalAuthorityarebothaffidavitsbytheDistrictAttorneyinwhichhestateshehasno interestinRespondententeringintoapretrialdiversionorsimilarprogram.ExhibitsBandCofRespondent’s SecondNoticeofSupplementalAuthorityareaffidavitsfromRespondent’sdefenseattorneysexplainingthat Respondentdidnotintendtoenterintoapretrialdiversionorsimilarprogramandthatthedefensecounsel’sinvestigationforthecriminalcaserevealednowrongdoingbyRespondent.ExhibitAinRespondent’s ThirdNoticeofSupplementalAuthorityistheSupersedingAddendumtoAgreementforWithdrawalof Charges,discussedbelow.ExhibitsBandDintheThirdNoticeofSupplementalAuthoritydonotrelatetothe issuesofthiscase.ExhibitCisaPennsylvaniaSupremeCourtopinionconcerninggrandjurysecrecyviolations whichmentionsinpassingthattheDistrictAttorneyhadenteredanolleprosequiinconnectionwiththeperjurychargesagainstRespondent.ExhibitDinRespondent’sThirdNoticeofSupplementalAuthorityisa reportbyaspecialprosecutorwhichdescribedflawsthegrandjuryproceedingsbutultimatelyrecommended investigationofthegrandjuryproceedingsbeabandoned.
312 FederalReserveBulletin|December2012 restrictionsplacedonMr.DeNaples,norisanyactionbyhimrequired.”TheBoardnotes, however,thattheSupersedingAddendumdoesnotdirectlyrescindormodifytheoriginal WithdrawalAgreementoranyof itsprovisions.Becausewherespecificcontractprovisions conflictwithmoregeneralones,thespecificprovisionscontrol,seeSouthwesternElec. Coop.,Inc.v.FERC,347F.3d975,982(D.C.Cir.2003),theBoardinterpretsthequoted sentenceassimplystatingthatonthedatetheSupersedingAddendumwasexecuted,no prohibitionsorrestrictionsremainedonRespondent.18SeealsoLeskov.FrankfordHospital,11A.3d917,923(Pa.2011).Thus,theSupersedingAddendumisirrelevanttotheissue of whetherRespondentagreedtoenterintoapretrialdiversionorsimilarprogram. TheBoardalsodeniesRespondent’smotionsforimmediatedismissal.Thesemotions,filed aftertheBoardnotifiedpartiesthattherecordof theseproceedingswascomplete,related toastatecourtorderexpungingthecriminalrecordspertainingtothewithdrawncriminal chargesagainstRespondent.TheBoardhasconsideredthesemotionsanddeniesthemfor thereasonsdiscussedbelow. Respondent’smotionsarebasedonordersheobtainedfromtheCourtof CommonPleas of DauphinCounty,Pennsylvania.Asnotedabove,onMay18,2011thatcourtissuedan ExpungementOrderexpungingthecriminalrecordspertainingtothewithdrawncriminal chargesagainstRespondent.ThatorderwasclarifiedonSeptember14,2011,intheClarificationOrder,whichexplainedthatpursuanttotheExpungementOrder,Respondent’s arrestrecordhadbeenexpunged“suchthatnoone,includinglawenforcement,statelicensingauthorities,orothergovernmentalofficials,ispermittedaccesstotherecordevenby courtorderunderPennsylvanialaw.”TheClarificationOrderstatedanyinformationnonethelessmaintainedpursuanttoPennsylvanialawshouldbeconsideredresidualinnature andnotasarecordof theproceeding.Finally,theClarificationOrderassertedthat “encompassedwithintheExpungementOrderwastheAgreementforWithdrawalof Charges(‘WithdrawalAgreement’)....Sinceithasbeencompletelyexpunged,theWithdrawalAgreementisof noforceoreffect.” Respondentcontendsthatbecauseof theExpungementOrder,asexplainedbytheClarificationOrder,theBoardmaynolongerenforcesection19againsthim.Insupport,hecites languageintheFDICPolicyStatementwhichstatesasection19applicationforconsentis notrequiredforanindividualwhohashadacriminalconvictionexpunged.FDICPolicy Statement,sectionB(2)(“Aconvictionwhichhasbeencompletelyexpungedisnotconsideredaconvictionof recordandwillnotrequireanapplication[undersection19].”). TheBoardrejectsthisargument.Inthefirstplace,asnotedabove,theBoardisnotbound bytheFDICPolicyStatement.Undersection19,theBoard,nottheFDIC,mustconsent toanindividualcontinuingasaninstitution-affiliatedpartyof abankholdingcompany. 12U.S.C.§1829(d).TheBoardhasnotadoptedtheFDICPolicyStatement,andthe Board’slackof aformalpolicyof itsowndoesnotentitleRespondenttorelyinsteadon theFDICPolicyStatement.19 18 EvenifRespondenthadpresentedadocumentpurporting,in2011,torescindtheWithdrawalAgreement executedin2009,theBoarddoesnotbelievesuchadocumentwouldaffecttheoutcomehere.Atthetime BoardEnforcementCounselinitiatedthisactionandtheALJissuedhisrecommendeddecision,Respondent wasinviolationofsection19becausehehadenteredintopretrialdiversionorsimilarprogramanddidnot havetheBoard’sauthorizationtoremainasaninstitution-affiliatedpartyofFirstNationalorUrbanFinancial.Alaterrescissionofthepretrialdiversionagreementwouldnotchangethathistory. 19 EveniftheFDIC’slegalinterpretationofsection19couldhavesomepreclusiveeffectontheBoard,thesectionofthePolicyStatementthatrelatestoexpungementisnotalegalinterpretation,sincethestatutoryprovisionneverusestheterm“expungement”orreferstotheconcept.TheFDIC’spositioninthisregardisthereforepurelyoneofitsownpolicy,whichtheBoardneednotfollow.Thepartieshavealsodisputedwhetheror
LegalDevelopments:SecondQuarter,2012 313 Inthesecondplace,theFDICPolicyStatementitself doesnotaddressthequestionpresentedhere,whichiswhetheranindividual’sagreementtoenterintoapretrialdiversionor similarprogramisnegated,forpurposesof section19,bythelaterexpungementof the underlyingcriminalcharge.TheFDICPolicyStatement,likesection19itself,treatsconvictionsandpretrialdiversionsseparately.See12U.S.C.§1829(a)(1)(A)(requiringprior agencyapprovalfor“anypersonwhohasbeenconvictedof anycriminaloffenseinvolving dishonesty...orhasagreedtoenterintoapretrialdiversionorsimilarprogram...” (emphasisadded);FDICPolicyStatementatB(1)(discussing,inconnectionwithwhether anapplicationundersection19isrequired,convictionsandtheeffectof completeexpungementthereof),B(2)(discussingpretrialdiversionprogramswithoutmentionof expungement).Thus,nothingintheFDICPolicyStatementsuggeststhatanapplicationundersection19wouldnotberequiredbytheFDICif anindividualwhohadagreedtoenterintoa pretrialdiversionorsimilarprogramhadlaterhadhisorherunderlyingcriminalcharge expunged. Theplainlanguageof section19providesthatpriorBoardapprovalisrequiredof “any personwhohas...agreedtoenterintoapretrialdiversionorsimilarprogram.”Asthe SupremeCourtdeterminedinasimilarcontextinholdingthatanexpungedstatecriminal convictioncouldcontinuetobeapredicateoffenseforfederalfirearmsprohibitions,“So farasthefaceof the[federal]statuteisconcerned,...expunctionunderstatelawdoesnot alterthehistoricalfactof theconviction....”Dickersonv.NewBannerInstitute,Inc., 460U.S.103,115(1983).20Likewise,asubsequentexpungementof acriminalchargedoes notalterthehistoricalfactthatRespondentagreedtotheWithdrawalAgreement,i.e.that Respondent“hasagreedtoenterintoapretrialdiversionorsimilarprogram.” See12U.S.C.§1829(a)(1)(A)(emphasisadded). Thereareimportantreasonswhyexpungementof acriminalchargeshouldnotaffectthe consequencesof arespondent’sagreementtoenterintoapretrialdiversionorsimilarprogram.Pretrialdiversionisamethodtoavoidafullcriminalprosecutionbyagreeingto explicitconditions;inmanystates,expungementof thecriminalrecordistheautomaticor atleasttheexpectedconclusionof thisprocessoncetheprogram’sconditionshavebeen fulfilled.SeePretrialJusticeInstitute,PretrialDiversionandtheLaw:ASamplingof Four Decadesof AppellateCourtRulings,V-2-6(2006)availableatwww.napsa.org/publications/ ptdivcaselaw.pdf.Respondent’sinterpretationwouldmeanthatatthepointwheretheindividual’sinvolvementinthepretrialdiversionprogramconcludes,itsexistencewouldin effectbenullifiedforpurposesof section19;itwouldbeasthoughtheindividualhadnever “agree[d]toenterinto”theprogramatall.Thisappearsinconsistentwiththeclearlyexpressedintentof Congress,whichwastorequiretheFDICortheBoard,asappropriate, topassonthefitnessof anyindividualwhohasagreedtoenterintosuchaprogramtoparticipateintheaffairsof federally-regulatedfinancialinstitutions.Whiletheexistenceof an expungementordermayberelevantinevaluatinganindividualwhenthatindividualapplies forconsentundersection19,itdoesnot,asRespondentargues,eliminatetheprior approvalrequirementclearlystatedinthatsection.Inaddition,somestatesdonotpermit expungementevenuponsuccessfulconclusionof apretrialdiversionprogram.Id.Itwould beanomalousforafederalagencytorequireapriorapplicationfromanindividualwho hadenteredintoapretrialdiversionprograminanon-expungementstate,buttopermit, withoutreview,theinvolvementinbankingof anindividualwhosestatepermits notRespondent’sexpungementis“complete”asusedintherecentamendmentstotheFDICPolicyStatement. See76FederalRegister28033.BecausetheBoardisnotfollowingtheFDICPolicyStatement,theBoardneed notresolvethisissue. 20 SubsequentCongressionalactiontooverturnthisrulingandprovidethatexpungedconvictionsshouldgenerallynotbeconsideredinconnectionwithfirearmslimitations,seePub.L.99-408,§101(5),100Stat.449,only underscoresthefactthatCongressknowshowtoaddresstheissueofexpungementifitsochooses.Ithas notdonesoinsection19.
314 FederalReserveBulletin|December2012 expungement. Section19grantstheBoardtheright,andtheobligation,toscrutinizeindividualswho haveenteredintoapretrialdiversionorsimilarprogrambeforepermittingtheircontinued involvementinbanking.Absentclearstatutorylanguageindicatingotherwise,theBoard doesnotbelieveCongressintendedtomakethisrightdependentonagivenstate’spolicy regardingexpungementandwillnotinterpretsection19toapplyinsuchanon-uniform manner.SeeHolyfield,490U.S.at43(“federalstatutesaregenerallyintendedtohaveuniformnationwideapplication”).Thus,despitetherecentExpungementOrderandClarificationOrder,Respondentremainsinviolationof section19forthesimplereasonthatin April2009hesignedtheWithdrawalAgreement,therebyenteringintoapretrialdiversion orsimilarprogramasthosetermsaredefinedinsection19,andhehasnotsoughtor obtainedBoardapprovalforhiscontinuedactivitiesasaninstitution-affiliatedpartyof FirstNationalorUrbanFinancial. Conclusion Forthesereasons,theBoardorderstheissuanceof theattachedOrdertoCeaseandDesist. ByOrderof theBoardof Governors,this10thdayof April,2012. JenniferJ.Johnson Secretaryof theBoard IntheMatterof LouisA.DeNaples,AnInstitution-AffiliatedPartyof FirstNational CommunityBancorp,Dunmore,Pennsylvania,andUrbanFinancialGroup,Inc.,Bridgeport, Connecticut FRB Docket No. 09-191-B-I OrdertoCeaseandDesist WHEREAS,pursuanttosection8(b)of theFederalDepositInsuranceAct,asamended, (the“FDIAct”)(12U.S.C.§1818(b)),theBoardof Governorsof theFederalReserve System(the“Board”)isof theopinion,forthereasonssetforthintheaccompanyingFinal Decision,thatafinalOrdertoCeaseandDesistshouldissueagainstLouisA.DeNaples (“DeNaples”),aninstitution-affiliatedparty,asdefinedinsection3(u)of theFDIAct (12U.S.C.§1813(u)),of FirstNationalCommunityBancorp,Dunmore,Pennsylvania,a registeredbankholdingcompany(“FirstNational”),andUrbanFinancialGroup,Inc., Bridgeport,Connecticut,aregisteredbankholdingcompany(“UrbanFinancial”). NOW,THEREFORE,ITISHEREBYORDERED,pursuanttosection8(b)of theFDI Act,12U.S.C.§1818(b),that: 1. DeNaplesshallnotviolatesection19of theFDIAct,12U.S.C.§1829. 2. Upontheeffectivedateof thisOrder,DeNaplesshallunconditionallyresignasadirectorof FirstNational. 3. Within30daysof theeffectivedateof thisOrder,DeNaplesshallsubmitanacceptable writtenplantodivesthiscontrollinginterestsinFirstNationalandUrbanFinancial. Anacceptabledivestitureplanshall,ataminimum,includingthefollowing: a. Statementssettingforththenumberof votingsharesandanyotherequityinterests of: i. FirstNational;and ii. UrbanFinancial, thatareownedorcontrolledbyDeNaples,asof thedateof thisOrder;
LegalDevelopments:SecondQuarter,2012 315 b. Statementssettingforththenumberof votingsharesandanyotherequityinterestsof: i. FirstNational;and ii. UrbanFinancial, thatareownedorcontrolledbyanypersonactinginconcertwithDeNaples, withinthemeaningof 12CFR225.41(a)(2)of theBoard’sRegulationY,asof thedateof thisOrder. c. Statementsdisclosingthenumberof votingsharesandanyotherequityinterests of: i. FirstNational;and ii. UrbanFinancial, thatareownedorcontrolledbyanymemberof DeNaples’immediatefamily, withinthemeaningof 12CFR225.41(a)(3)of theBoard’sRegulationY,asof thedateof thisOrder. d. Ascheduleforthedivestitureof FirstNationalvotingsharesownedorcontrolled byDeNaplessuchthatafterthedivestitureDeNapleswouldnotownorcontrol personallyoractinginconcertwithotherpersonssharesthatwouldrequireprior noticeunder12CFR225.41(c),asif thesharesownedorcontrolledpersonallyor actinginconcertwithotherpersonshadbeenacquiredafterthedivestiture. e. Ascheduleforthedivestitureof UrbanFinancialvotingsharesownedorcontrolledbyDeNaplessuchthatafterthedivestitureDeNapleswouldnotownor controlpersonally,oractinginconcertwithotherpersons,sharesthatwould requirepriornoticeunder12CFR225.41(c),asif thesharesownedorcontrolled personallyoractinginconcertwithotherpersonshadbeenacquiredafterthe divestiture. f. Theplanshallincludeaschedulesuchthatthedivestituresshallbecompleted within180daysaftertheeffectivedateof theOrder. g. Theplanshallprovidethatthedivestitureof thesharesshallbe: i. tothirdpartiesunrelatedtoDeNaplesinarms-lengthtransactions;or ii. if toanypersonwhohaspreviouslyactedinconcertwithDeNapleswith respecttoFirstNationalorUrbanFinancial,orwouldbeconsideredtobe actinginconcertwithDeNaplesatthetimeof thedivestiture(includingpersonspresumedtobeactinginconcertwithDeNaplesassetforthin12CFR 225.41(d)),theplanshallincludeadequateassurances(throughatrustorotherwise)suchthatDeNapleswouldnothavetheabilitytoactinconcertwith, orexerciseanycontrolorcontrollinginfluenceoverthesharesof First NationalorUrbanFinancial,respectively.Themechanismandtheindividuals orentitieswhocontrolthesharesinanymannerthroughatrustorotherwise shallbesubjecttotheapprovalof theBoard. h. Theplanshallfurtherprovidefordisclosureof anyfinancialorpersonalrelationshipsbetweenDeNaples,andhisrelatedinterests(asdefinedin12CFR215.3(n), ontheonehand,andeachacquirerandhisorherrelatedinterests,ontheother hand,of anysharesof FirstNationalorUrbanFinancialdivestedpursuanttothe plan. 4. Respondentshallfullycomplywithallof thetermsof anyacceptabledivestitureplan submitted. 5. Respondentshallsubmithiswrittendivestitureplanandothercorrespondencewith respecttothisOrderto: a. RichardM.Ashton DeputyGeneralCounsel Boardof Governorsof theFederalReserveSystem 20th&CSts.,NW Washington,DC20551 b. ThomasBaxter
316 FederalReserveBulletin|December2012 GeneralCounsel FederalReserveBankof NewYork 33LibertyStreet NewYork,NewYork10045 (withrespecttoUrbanFinancial) c. JeanneRentezelas FederalReserveBankof Philadelphia 10IndependenceMall Philadelphia,PA19106-1574 (withrespecttoFirstNational) 6. Anyviolationof thisOrdershallsubjectRespondenttoappropriatepenaltiesunder 12U.S.C.§1818(i). 7. TheBoarddelegatestotheBoard’sGeneralCounsel(orhisdelegee),withtheconcurrenceof theDirectorof theDivisionof BankingSupervisionandRegulation(orhis delegee),theauthoritytodeterminetheacceptabilityof anydivestitureplansubmitted byRespondentpursuanttothisOrder,toacceptmodificationstoanypreviously accepteddivestitureplan,andtograntextensionsof time. 8. ThisOrder,andeachandeveryprovisionhereof,isandshallremainfullyeffectiveand enforceableuntilexpresslystayed,modified,terminatedorsuspendedinwritingbythe Board. ThisOrderiseffective30daysafterserviceontheRespondent. ByOrderof theBoardof Governors,this10thdayof April,2012. BOARDOFGOVERNORSOFTHE FEDERALRESERVESYSTEM JenniferJ.Johnson Secretaryof theBoard
317 Federal Reserve BULLETIN December 2012 Vol. 98, No. 8 Legal Developments: Third Quarter, 2012 Orders Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act Old National Bancorp Evansville, Indiana OrderApprovingAcquisitionof aBankHoldingCompany FRBOrderNo.2012–9(August30,2012) OldNationalBancorp(“ONB”),Evansville,Indiana,hasrequestedtheBoard’sapproval undersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquireIndiana CommunityBancorp(“ICB”)andtherebyindirectlyacquireitssubsidiarybank,Indiana BankandTrustCompany(“IBTC”),bothof Columbus,Indiana.Immediatelyfollowing theproposedacquisition,IBTCwouldbemergedintoONB’ssubsidiarybank,Old NationalBank(“ONBK”),Evansville.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister33460(2012)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. ONB,withtotalconsolidatedassetsof approximately$8.6billion,isthe113thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$6.7billion indeposits.3ONBK,ONB’sonlyinsuredsubsidiarydepositoryinstitution,operatesinIllinois,Indiana,Kentucky,andOhio.4ONBKisthefourthlargestdepositoryinstitutionin Indiana,controllingdepositsof approximately$4.6billion,whichrepresentapproximately 4.7percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.5 ICB,withtotalconsolidatedassetsof approximately$968million,controlsIBTC,which operatesonlyinIndiana.IBTCisthe25thlargestinsureddepositoryinstitutioninIndiana, controllingapproximately$860millionindeposits.Onconsummationof thisproposal, ONBwouldremainthefourthlargestinsureddepositoryorganizationinIndiana,controllingdepositsof approximately$5.6billion,whichrepresentapproximately5.6percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate. 1 12U.S.C.§1842. 2 ThemergerofIBTCintoONBKissubjecttoapprovalbytheOfficeoftheComptrolleroftheCurrencyunderthe BankMergerAct. 3 Nationaldeposit,asset,andrankingdataareasofMarch31,2012,andareupdatedtoreflectmergersthroughthat date.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavings banks. 4 ONBownsallofthecapitalstockofONBK. 5 Statedeposit,asset,andrankingdataareasofJune30,2011.
318 FederalReserveBulletin|December2012 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking marketunlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.6 ONBandICBhavesubsidiarydepositoryinstitutionsthatcompetedirectlyintheLouisville,KentuckybankingmarketandintheIndianabankingmarketsof Indianapolisand Seymour.7TheBoardhasreviewedthecompetitiveeffectsof theproposalinthesebanking marketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets,therelativesharesof total depositsindepositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyONB andICB,8theconcentrationlevelsof marketdepositsandtheincreaseinthoselevelsas measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice MergerGuidelines(“DOJGuidelines”),9andothercharacteristicsof themarkets. A.BankingMarketswithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe DOJGuidelinesintheIndianapolis10andLouisville11bankingmarkets.Onconsummation of theproposal,bothmarketswouldremainmoderatelyconcentrated,asmeasuredbythe HHI,andanumberof competitorswouldremainineachbankingmarket.12 6 12U.S.C.§1842(c)(1). 7 TheLouisvillebankingmarketencompassesSalem,Indiana,whereITBChasabranch.ITBChasoperations onlyinIndiana. 8 DepositandmarketsharedataareasofJune30,2011,updatedtoreflectmergersthroughJune4,2012,and arebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989); NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthrift depositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 9 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepostmergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points. AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin2010, theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin1995,werenot changed.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 10 TheIndianapolisbankingmarketisdefinedasBoone,Hamilton,Hancock,Hendricks,Johnson,Marion,Morgan,andShelbyCounties,Indiana;andGreenTownshipinMadisonCounty,Indiana. 11 TheLouisvillebankingmarketisdefinedasBullitt,Henry,Jefferson,Meade,Nelson,Oldham,Shelby,and SpencerCounties,Kentucky;theBedfordcensuscountydivisioninTrimbleCounty,Kentucky;theFortKnox andWestPointcensuscountydivisionsandthecitiesofVineGroveandRadcliffinHardinCounty,Kentucky; thecityofIrvingtoninBreckinridgeCounty,Kentucky;Clark,Floyd,Harrison,andWashingtonCounties, Indiana;andCrawfordCounty,Indiana(excludingPatokaTownship).AlthoughtheLouisvillemarketis locatedprimarilyinKentucky,italsoincludesSalem,Indiana,whereIBTCoperatesabranchandcompetes directlywithONBK. 12 IntheIndianapolisbankingmarket,ONBKwouldremainthetenthlargestdepositoryinstitution,controlling depositsof$738.3million,representingapproximately2.4percentofmarketdeposits.TheHHIwouldincrease by1pointto1409,and42othercompetitorswouldremaininthemarket.IntheLouisvillebankingmarket,
LegalDevelopments:ThirdQuarter,2012 319 B.BankingMarketExceedingEstablishedGuidelines ONBandICBcompetedirectlyintheSeymourbankingmarket.13Thismarketwarrantsa detailedreviewof thecompetitiveeffectsof theproposalbecausetheconcentrationlevelon consummationwouldexceedthethresholdlevelsintheDOJGuidelines. ONBKistheseventhlargestof teninsureddepositoryinstitutionsintheSeymourbanking market,controllingdepositsof approximately$29.8million,whichrepresentapproximately 4percentof marketdeposits.IBTCisthesecondlargestinsureddepositoryinstitutionin themarket,controllingdepositsof approximately$190.6million,whichrepresentapproximately25.5percentof marketdeposits.Onconsummation,ONBwouldbecomethelargest insureddepositoryorganizationinthemarket.TheHHIwouldincreaseby203pointsto 2107,andtheproformamarketshareof thecombinedentitywouldbeapproximately 29.5percent. Afterconsummationof theproposal,eightothercommercialbankcompetitorswould remain,somewithasignificantpresenceinthemarket.Thesecondlargestbankcompetitorinthemarketwouldcontrol27.6percentof marketdeposits,andfourotherbankcompetitorsinthemarketeachwouldcontrolbetween5percentand17percentof market deposits. Inaddition,oneactivecommunitycreditunionintheSeymourbankingmarket,Centra CreditUnion,offersawiderangeof consumerproducts,operatesstreet-levelbranches, andhasbroadmembershipcriteriathatincludemostof themarket’sresidents.14Accordingly,theBoardhasconcludedthattheactivitiesof thiscreditunionexertacompetitive influencethatmitigates,inpart,thepotentialeffectsof theproposal. CentraCreditUnioncontrolsapproximately$18.3millionindepositsinthemarketthat, ona50percentweightedbasis,representsapproximately2.4percentof marketdeposits. Afterinclusionof thesedeposits,ONBwouldcontrolapproximately28.8percentof marketdeposits,andtheHHIwouldincreaseby193pointsto2013,anincreasethatiswithin DOJGuidelines. C.Viewof OtherAgenciesandConclusiononCompetitiveConsiderations TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatefederalbankingagencyhasbeenaffordedanopportunitytocommentandhas notobjectedtotheproposal. Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinanyrelevantbankingmarket.Accordingly,basedonallthefactsof record, theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. ONBKwouldbecomethe24thlargestdepositoryinstitution,controllingdepositsofapproximately$136.8million,representinglessthan1percentofmarketdeposits.TheHHIwouldremainunchangedat972,and44 othercompetitorswouldremaininthemarket. 13 TheSeymourbankingmarketisdefinedasJacksonCounty,Indiana. 14 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionsasamitigatingfactor.See, e.g.,ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancialCorporation,93FederalReserveBulletinC16(2007);WachoviaCorporation,92FederalReserveBulletinC183(2006); andF.N.B.Corporation,90FederalReserveBulletin481(2004).
320 FederalReserveBulletin|December2012 OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Thosefactorsincludethefinancial andmanagerialresources(includingconsiderationof thecompetence,experience,and integrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof the companyandbanksconcerned;theeffectivenessof thecompanyincombattingmoney laundering;theconvenienceandneedsof thecommunitytobeserved;andtheextentto whichtheproposalwouldresultingreaterormoreconcentratedriskstothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardhasconsideredallthesefactorsand, asdescribedbelow,hasdeterminedthattheyareconsistentwithapprovalof theapplication.Thereviewwasconductedinlightof allthefactsof record,includingsupervisoryand examinationinformationfromvariousU.S.bankingsupervisorsof theinstitutions involved,publiclyreportedandotherfinancialinformation,andinformationprovided byONB. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpact of theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.ONBandONBKarewell capitalizedandwouldremainsoonconsummationof theproposedacquisition.Theproposedtransactionisabankholdingcompanymerger,structuredasashareexchange.Asset qualityandearningsprospectsareconsistentwithapproval,andONBappearstohave adequateresourcestoabsorbthecostsof theproposalandtheproposedintegrationof the institutions’operations.Basedonitsreviewof therecord,theBoardfindsthatONBhas sufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of ONB,ONBK,ICB,andIBTC,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations andtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws. TheBoardalsohasconsideredONB’splansforimplementingtheproposal,includingthe proposedmanagementafterconsummationof theproposal.Inaddition,theBoardhas consideredthefutureprospectsof theorganizationsinvolvedintheproposalinlightof the financialandmanagerialresourcesandtheproposedbusinessplan. ONBandONBKeachareconsideredtobewellmanaged.ONBwouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization.Inaddition, ONB’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner.Furthermore,ONBhasdemonstrateda
LegalDevelopments:ThirdQuarter,2012 321 recordof successfullyintegratingotherbankingorganizationsintoitsoperationsandriskmanagementsystemsafteracquisitions. OnJune4,2012,ONBKenteredintoaStipulationandConsenttotheIssuanceof aConsentOrder(the“ConsentOrder”)withtheOfficeof theComptrollerof theCurrency (“OCC”)relatingtodeficienciesinONBK’soverallprogramforBankSecrecyAct/antimoney-laundering(“BSA/AML”)compliance.TheConsentOrderrequiresONBKto, amongotherthings,takethefollowingactions:developandimplementacomprehensive BSAactionplan,includinganeffectiveinstitution-wideBSArisk-assessmentprogramthat accuratelyidentifiesBSA/AMLrisks;ensurethatONBKmanagementreviews,updates, andimplementsitsrisk-basedprocessestoobtainandanalyzeappropriatecustomerdue diligenceinformationtomonitorforandinvestigatesuspiciousactivity;ensureadherence toawrittenprogramof internalcontrolsforappropriateidentification,analysis,andmonitoringof transactionswithgreaterthannormalrisk;maintainaneffectiveBSAindependenttestingfunction;ensureandmaintainsufficientpersonnelwithrequisiteexpertiseand skills;andensureadherencetoacomprehensiveBSA/AMLtrainingprogram. ONBK’sBSA/AMLprogramdeficiencieswereidentifiedbytheOCCinearly2011.Since thattime,ONBKhasdevotedsignificanttimeandresourcestowardimprovingitsBSA/ AMLprogramandhasmadesubstantialprogresstowardsfullyaddressingprogramweaknesses.Majoradvancementstocorrectthedeficienciesincludethefollowingsteps:thepurchaseandinstallationof anewtransaction-monitoringsystem;anenhancedBSARisk AssessmentforallONBKactivitiesandproducts;strengtheningof ONBK’scoreBSA/ AMLmanagementteamsbyhiringemployeesexperiencedinthoseareas;enhancementsto customerduediligenceprocesses;andenhancementandsupplementationof theBSA/ AMLexpertise,staffing,andmethodologieswithinONBK’sInternalAuditfunction. ONBKexpectstocompleteitscorrectiveactionsinthethirdquarterof 2012. TheBoardhasconsultedwiththeOCC,theresponsiblefederalbankingagencyforONBK, concerningthisproposal.TheOCChasconfirmedthatONBKhastakencorrectiveactions toaddressthemattersdescribedintheConsentOrder.TheOCCalsohasconfirmedthat theweaknessesidentifiedrelatedtopoliciesandproceduresandthattherewasnoevidence of moneylaunderingorotherunlawfulactivitiesatONBK.TheOCCsupportstheproposalanddoesnotbelievethattheacquisitionwilldetractthebankfromfullyaddressing itsremainingBSAweaknessesinatimelymanner.Furthermore,ONBhascommittedto theBoardthatitwillfullyaddressandresolveallBSA/AMLweaknessesandviolations identifiedintheConsentOrderandthatuntilsuchtimeastheyhavebeenfullyaddressed, ONBwillprovidequarterlyprogressreportstotheFederalReserveBankof St.Louis. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedare consistentwithapproval. B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitytobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).15TheCRArequiresfederalfinancialsupervisoryagenciesto encourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommu- 15 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq.
322 FederalReserveBulletin|December2012 nitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,16andrequires theappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglowandmoderate-incomeneighborhoods,inevaluatingbankexpansionaryproposals.17 TheBoardhasconsideredtheconvenienceandneedsfactorandtheCRAperformance recordsof ONBKandIBTCinlightof allthefactsof record.AsprovidedintheCRA,the Boardevaluatestherecordof performanceof aninstitutioninlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.18ONBKreceiveda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof June30,2008,andIBTCreceiveda“satisfactory”ratingatitsmost recentCRAperformanceevaluationbytheFederalReserveBankof St.Louis,asof August4,2008. Basedonareviewof theentirerecord,theBoardhasconcludedthatconsiderationsrelatingtoconvenienceandneedsconsiderationsandtheCRAperformancerecordsof therelevantinsureddepositoryinstitutionsareconsistentwithapproval. C.FinancialStability TheBoardhasalsoconsideredinformationrelevanttotheriskstothestabilityof the UnitedStatesbankingorfinancialsystem.Theproposedinvestmentrepresentsademinimistransactionforfinancialstabilitypurposes,andtheproposedtransactionwouldnot materiallyincreasetheinterconnectednessorcomplexityof ONB.TheBoard,therefore, concludesthatfinancialstabilityconsiderationsinthisproposalareconsistentwith approval. Basedonallthefactsof record,includingthosedescribedabove,theBoardhasdetermined thatallthefactorsitmustconsiderundersection3(c)of theBHCActareconsistentwith approval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyONBwithalltheconditionsimposedinthisorderandthecommitments madetotheBoardinconnectionwiththeapplication,includingreceiptof allrequired regulatoryapprovals.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof St.Louis,actingpursuantto delegatedauthority. 16 12U.S.C.§2901(b). 17 12U.S.C.§2903. 18 TheInteragencyQuestionsandAnswersRegardingCommunityReinvestmentprovidethataninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailed,on-siteevaluationoftheinstitution’soverallrecordofperformanceunderthe CRAbyitsappropriatefederalsupervisor.75FederalRegister11642at11665(2010).
LegalDevelopments:ThirdQuarter,2012 323 Byorderof theBoardof Governors,effectiveAugust30,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,andStein.Absentandnotvoting:GovernorPowell. MargaretMcCloskeyShanks AssociateSecretaryof theBoard Order Issued Under Section 4 of the Bank Holding Company Act BB&T Corporation Winston-Salem, North Carolina OrderApprovingtheAcquisitionof aSavingsAssociation FRBOrderNo.2012–8(July31,2012) BB&TCorporation(“BB&T”),afinancialholdingcompanywithinthemeaningof the BankHoldingCompanyAct(“BHCAct”),hasrequestedtheBoard’sapprovalundersections4(c)(8)and4(j)of theBHCActandsection225.24of theBoard’sRegulationY1to acquireallthevotingsharesof BankAtlantic,asubsidiaryfederalsavingsassociationof BankAtlanticBancorp,Inc.(“BABancorp”),asavingsandloanholdingcompany,bothof FortLauderdale,Florida.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(77FederalRegister1072(January9,2012))and thetimeforfilingcommentshasexpired.TheBoardhasconsideredallcommentsreceived ontheproposal.3 BB&T,withtotalconsolidatedassetsof approximately$174.8billion,isthe18thlargest depositoryorganizationintheUnitedStates,asmeasuredbyassetsize.4BB&Tisthe eighthlargestdepositoryorganizationintheUnitedStates,asmeasuredbydeposits,and controlsdepositsof approximately$142.4billion,whichrepresentapproximately1.58percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates. BB&Tcontrolstwoinsureddepositoryinstitutions,BranchBankandBB&TFinancial, 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 2 Immediatelyfollowingtheproposedacquisition,BankAtlanticwouldbemergedintoBB&T’sleadsubsidiary bank,BranchBankingandTrustCompany(“BranchBank”)(totalassetsof$168.9billion),alsoofWinston- Salem.ThatmergerproposalissubjecttoapprovalbytheFederalDepositInsuranceCorporation(“FDIC”) undertheBankMergerActandbytheNorthCarolinaBankingCommission(“State”)understatelaw.The StateapprovedthemergeronMarch14,2012,andtheFDICapprovedthemergeronJuly16,2012,conditionedontheFederalReserve’sapprovalofthisnotice. 3 Duringtheapplicationprocess,BB&Trestructureditsoriginalproposal,whichwouldhaveresultedinBABancorpretainingitsobligationtopayitsTrustPreferredSecurities(“TPS”)holders.TPSholdersobjectedtothis proposal,contendingthat(a)themannerinwhichtheproposalwasstructuredwasillegal;(b)theproposed transactionviolatedBABancorp’sobligationstoitscreditorsandexposedBABancorp,BankAtlantic,and BB&Ttolitigation;(c)theproposedtransactionwouldbeinconsistentwithsoundprudentialregulation;and (d)theproposedcompensationstructurewouldpermitinsiderstoexploitthebankingsystemandevadeprudentialregulation.Thefirstthreeofthesecommentsuniquelyrelatedtotheoriginalproposalandarenolonger relevantinlightoftherestructuredproposal.Thecommentoncompensationaswellasobjections(b)and (c)werealsoformallywithdrawnaftertherestructuredproposalwassubmitted. 4 Nationaldeposit,asset,andrankingdataareasofDecember31,2011,andincludemergersthroughthatdate. Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavings banks.
324 FederalReserveBulletin|December2012 F.S.B.(“FSB”),Columbus,Georgia.5BranchBankoperatesbranchesinAlabama,Florida, Georgia,Indiana,Kentucky,Maryland,NorthCarolina,SouthCarolina,Tennessee,Texas, Virginia,WestVirginia,andtheDistrictof Columbia.InFlorida,BranchBankisthefifth largestdepositoryinstitution,controllingdepositsof approximately$12.6billion.6 BABancorp,withtotalconsolidatedassetsof $3.8billion,controlsBankAtlantic,which operatesonlyinFlorida.7BankAtlanticisthe17thlargestdepositoryinstitutionin Florida,controllingdepositsof approximately$3.5billion. Onconsummationof theproposal,BB&Twouldbecomethe17thlargestdepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$178.6billion.BB&Twouldcontroldepositsof approximately$145.9billion,whichrepresent 1.63percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates. InterstateandDepositCapAnalyses TheDodd-FrankWallStreetReformandConsumerProtectionActof 2010,Pub.L.No. 111-203,124Stat.1601(2010)(“Dodd-FrankAct”),amendedsection4of theBHCActto prohibittheBoardfromapprovinganapplicationbyabankholdingcompanytoacquire aninsureddepositoryinstitution,includingasavingsassociation,if thehomestateof the insureddepositoryinstitutionisastateotherthanthehomestateof thebankholdingcompany,andtheapplicantcontrolsorwouldcontrolmorethan10percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates(“nationwide depositcap”).8Thenationwidedepositcapwasintendedtohelpguardagainstundueconcentrationsof economicpower.9Forpurposesof theBHCAct,thehomestateof BB&Tis NorthCarolina,andthehomestateof BankAtlanticisFlorida.10 Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutionsinthe UnitedStates,thetotalamountof depositsof insureddepositoryinstitutionsis$8.9trillion.11Onconsummationof theproposedtransaction,BB&Twouldcontrolapproximately 1.63percentof thetotalamountof depositsininsureddepositoryinstitutionsinthe 5 BranchBankisBB&T’slargestsubsidiarydepositoryinstitution,asmeasuredbybothassetsanddeposits. FSB,afederalsavingsbank,offers,primarilythroughtheInternet,creditcardandmerchantservices,consumer andcommercialoutdoorequipmentloans,marineandrecreationalvehicleloans,retailautoloans,andprepaid cardproducts. 6 Statedeposit,asset,andrankingdataareasofJune30,2011. 7 BABancorp,inturn,iscontrolledbyBFCFinancialCorporation,Inc.,apubliclytradedsavingsandloan holdingcompany. 8 Dodd-FrankAct§623(b),codifiedat12U.S.C.§1843(i)(8).Foradetaileddiscussionofthenationwidedeposit cap,seeBankofAmericaCorporation/LaSalle,(orderdatedSept.14,2007),93FederalReserveBulletinC109, C109-C110(3rdQuar.2007);BankofAmericaCorporation/Fleet,(orderdatedMar.8,2004),90Federal ReserveBulletin217,219-220(Spring2004)(“FleetOrder”). 9 SeeFleetOrderat219. 10 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.12U.S.C.§1841(o)(4)(C).Forafederalsavingsassociation,thehomestateisthestatein whichthehomeofficeofthesavingsassociationislocated.12U.S.C.§1841(o)(4)(E). 11 DepositdataarecalculatedbasedonreportsfiledbyinsureddepositoryinstitutionsandareasofDecember31,2011.EachbankinsuredbytheFDICintheUnitedStatesmustreportdataregardingitstotaldeposits inaccordancewiththedefinitionof“deposit”undertheFederalDepositInsuranceAct,12U.S.C.§1813(l), ontheinstitution’sConsolidatedReportofConditionandIncome.Eachinsuredsavingsassociationsimilarly mustreportitstotaldepositsontheinstitution’sThriftFinancialReport.DepositdataforFDIC-insuredU.S. branchesofforeignbanksandfederalbranchesofforeignbanksareobtainedfromtheReportofAssetsand LiabilitiesofU.S.BranchesandAgenciesofForeignBanks.ThesedataarereportedquarterlytotheFDIC andarepubliclyavailable.
LegalDevelopments:ThirdQuarter,2012 325 UnitedStates.Accordingly,inlightof allthefactsof record,theBoardisnotprohibited fromapprovingtheproposalundersection4(j)of theBHCAct. FactorsGoverningBoardReviewof theTransaction TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.12TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesorfinancialholdingcompaniesconformtheirdirectandindirectactivitiesto thosepermissibleforbankholdingcompaniesundersection4(c)(8)of theAct.13BB&T hascommittedthatalltheactivitiesof BankAtlanticwillconformtothoseactivitiesthat arepermissibleundersection4of theBHCActandRegulationYwithintheact’stwo-year conformanceperiodaftertheacquisition. Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof BankAtlantic“canreasonablybeexpectedtoproducebenefitstothepublic, suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.”14Aspartof itsevaluationof thosefactors,the Boardreviewsthefinancialandmanagerialresourcesof thecompaniesinvolved,theeffect of theproposaloncompetitionintherelevantmarkets,therisktothestabilityof the UnitedStatesbankingorfinancialsystem,andthepublicbenefitsof theproposal.15Inactingonanoticetoacquireasavingsassociation,theBoardalsoreviewstherecordsof performanceof therelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).16 CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardhasconsideredthecompetitiveeffectsof BB&T’sacquisitionof BankAtlanticin lightof allthefactsof record.BB&TandBankAtlanticcompetedirectlyinthreebanking markets,allinFlorida:FortPierceMetropolitanStatisticalArea(“FortPierce”),Miami- FortLauderdale-PompanoMetropolitanStatisticalArea(“Miami-FortLauderdale-Pompano”),andWestPalmBeachMetropolitanStatisticalArea(“WestPalmBeach”).17The Boardhasreviewedthecompetitiveeffectsof theproposalineachof thesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof 12 12CFR225.28(b)(4)(ii). 13 Asavingsassociationoperatedbyabankholdingcompanymayengageonlyinactivitiesthatarepermissible forbankholdingcompaniesundersection4(c)(8)oftheBHCAct.12CFR225.28(b)(4)(ii). 14 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankActadded“risktothestabilityoftheUnited Statesbankingorfinancialsystem”tothelistofpossibleadverseeffects. 15 See12CFR225.26;see,e.g.,BankofAmericaCorporation/Countrywide,(orderdatedJune5,2008),94Federal ReserveBulletinC81(2ndQuar.2008);WachoviaCorporation,(orderdatedSept.29,2006),92FederalReserve BulletinC138(3rdQuar.2006);BancOneCorporation,(orderdatedMay14,1997),83FederalReserveBulletin 602(1997). 16 12U.S.C.§2901etseq.InassessingthemergerproposalofBankAtlanticintoBranchBankundertheBank MergerAct,theFDICisrequiredtotakeintoconsiderationthesamefactorsthatarereviewedbytheBoard undertheBHCAct,includingtheeffectsoftheacquisitiononfinancialstabilityandontheconvenienceand needsofthecommunitytobeserved.12U.S.C.§1828(c)(5). 17 FortPierceisdefinedasSt.LucieCountyandMartinCounty(excludingthetownsofIndiantownandHobe Sound).Miami-FortLauderdale-PompanoisdefinedasBrowardandMiami-DadeCounties.WestPalmBeach isdefinedasPalmBeachCountyeastofLoxahatcheeandthetownsofIndiantownandHobeSoundinMartin County.
326 FederalReserveBulletin|December2012 competitorsthatwouldremaininthemarkets,therelativesharesof totaldepositsin depositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyBB&Tand BankAtlantic,theconcentrationlevelsof marketdepositsasmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeMergerGuidelines(“DOJ Guidelines”),18andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJGuidelinesineachof thethreebankingmarkets.Onconsummation of theproposal,onemarketwouldremainunconcentrated,andtwomarketswouldremain moderatelyconcentrated,allasmeasuredbytheHHI.ThechangesintheHHI’smeasure of concentrationwouldbeminimal,andnumerouscompetitorswouldremaininallthree bankingmarkets.19 TheDOJhasconductedareviewof thepotentialcompetitiveeffectsof theproposaland hasadvisedtheBoardthatconsummationof thetransactionwouldnotbelikelytohavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposed transactionwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarketandisconsistentwithapproval. FinancialandManagerialResources TheBoardhasconsideredthefinancialandmanagerialresourcesof BB&T,itssubsidiaries, andBankAtlanticandtheeffectof thetransactiononthoseresources,inlightof confidentialreportsof examination,othersupervisoryinformationfromtheprimaryfederal supervisorof theorganizationsinvolvedintheproposal,publiclyreportedandotherfinancialinformation,informationprovidedbyBB&TandBankAtlantic,andotherrelevant information.TheBoardalsoconsultedwiththeFDIC,theprimaryfederalsupervisorof BB&T’sleadsubsidiarydepositoryinstitution,BranchBank,andtheOfficeof theComptrollerof theCurrency(“OCC”),theprimaryfederalsupervisorof BankAtlanticandFSB. Inevaluatingfinancialresourcesinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiaryinsured 18 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywillnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points.The DOJhasstatedthatthehigher-than-normalHHIthresholdsforscreeningbankmergersandacquisitionsfor anticompetitiveeffectsimplicitlyrecognizethecompetitiveeffectsoflimited-purposeandothernondepository financialentities.AlthoughtheDOJandtheFederalTradeCommissionrecentlyissuedrevisedHorizontal MergerGuidelines,theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwere issuedin1995,werenotchanged.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 19 TheHHIwoulddecreaseineachmarketasfollows:18pointsto1013inFortPierce,3pointsto703inMiami- FortLauderdale-Pompano,and11pointsto1009inWestPalmBeach.ThosedecreasesresultfromapremergerweightingofBankAtlantic’smarketdepositsat50percentandapost-mergerweightingat100percent. SeeNorwestCorporation,78FederalReserveBulletin452(1992);FirstBanks,Inc.,76FederalReserveBulletin 669(1990)(depositsofthriftsareincludedinpre-mergermarketsharecalculationsona50percentweighted basisbutincludedat100percentinthecalculationofproformamarketsharebecausethedepositswouldbe acquiredbyacommercialbankingorganization).TheresultingproformasharesofBB&T’smarketdeposits wouldbeasfollows:4.9percentinFortPierce,4.0percentinMiami-FortLauderdale-Pompano,and 4.5percentinWestPalmBeach.
LegalDevelopments:ThirdQuarter,2012 327 depositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthis evaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,asset quality,andearningsperformance.Inassessingfinancialfactors,theBoardconsistentlyhas consideredcapitaladequacytobeespeciallyimportant.TheBoardevaluatesthefinancial conditionof thecombinedorganizationatconsummation,includingitscapitalposition, assetquality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions. TheBoardhasconsideredthefinancialfactorsof theproposal.BB&T’sregulatorycapital ratiosarewellabovetheminimumsrequiredof well-capitalizedbankholdingcompanies andwouldremainsoonconsummationof theproposal.BB&T’ssubsidiarydepository institutionsarewellcapitalizedandwouldremainsoafterconsummation.BB&Twould acquireapproximately$2.1billioninloansandassumeapproximately$3.3billionindepositsfromBankAtlantic,aswellasapproximately$285millioninoutstandingTPS.The transactionwouldbefundedwithavailablecashonhand,andtherearenoplanstoraise additionalcapitalorissueanydebtobligationsinconnectionwiththetransaction.Asset qualityandearningsprospectsalsoareconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BB&T,itssubsidiaryinsureddepositoryinstitutions,andBankAtlantic,including assessmentsof theirmanagementexpertise,internalcontrols,riskmanagementsystems, andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthose of otherrelevantfinancialsupervisoryagencieswiththeorganizationsandtheorganizations’recordsof compliancewithapplicablebankinglawsandwithanti-money-laundering laws.TheBoardhasalsoconsideredthecommentsitreceivedontheproposal. BB&Tanditssubsidiarydepositoryinstitutionsareconsideredtobewellmanaged.BB&T wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,whichareregardedassatisfactory.Inaddition,BB&T’smanagementhasthe experienceandresourcestoensurethesuccessfulintegrationof thetwoorganizationsand thesafeandsoundoperationof thecombinedorganization.20 Basedonallthefactsof record,includingareviewof thecommentsreceived,theBoard hasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresourcesof the organizationsinvolvedintheproposalareconsistentwithapprovalundersection4of the BHCAct. ConvenienceandNeedsConsiderations Asnoted,theBoardreviewstherecordsof performanceundertheCRAof therelevant insureddepositoryinstitutionswhenactingonanoticetoacquireanyinsureddepository institution,includingasavingsassociation.21TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneeds of thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,22andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto 20 TwocommentersreferencedanSEClawsuitallegingthatthechairmanofBABancorphadengagedinapatternofmisleadingBABancorp’sinvestorsthroughselectiveanduntimelydisclosureswithrespecttoproblem loans.TheindividualsnamedinthelawsuitwillnotbeassociatedwithBB&TorBankAtlanticafterconsummationoftheproposedtransaction. 21 12U.S.C.§2901etseq. 22 12U.S.C.§2901(b).
328 FederalReserveBulletin|December2012 accountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentire community,includinglowandmoderateincome(“LMI”)neighborhoods,inevaluating bankexpansionaryproposals.23 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformancerecordsof BB&T’ssubsidiaryinsureddepositoryinstitutionsandof BankAtlantic,datareportedbyBB&TandBankAtlanticundertheCRAandtheHome MortgageDisclosureAct(“HMDA”),24otherinformationprovidedbyBB&T,andconfidentialsupervisoryinformation.TheBoardhasalsoconsideredthepubliccomments receivedontheproposalregardingthedepositoryinstitutions’CRA,fairlending,and HMDAperformance. A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasevaluatedtheproposalinlightof theexaminations bytheappropriatefederalsupervisorsof theCRAperformancerecordsof theinsured depositoryinstitutionsinvolvedintheproposal.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.25 BranchBankreceivedanoverall“Satisfactory”ratingatitsmostrecentCRAperformance evaluationbytheFDIC,asof January22,2008.ThePublicEvaluation(“PE”)forthat examinationgaveBranchBankratingsof “HighSatisfactory”fortheLendingTestand “Outstanding”fortheInvestmentandServiceTests.Substantiveviolationsof theEqual CreditOpportunityActandtheFairHousingActwerenotedandresultedinBranch Bank’soverallCRAratingbeingloweredfrom“Outstanding”to“Satisfactory.”TheBoard consultedwiththeFDIConBB&T’sfairlendingrecordregardingtheprogressmadeby BranchBank’smanagementtoaddressthesemattersandtocorrectitsfairlendingpolicies andproceduresandfeestructuretohelpensurecompliancewiththefairlendinglaws.26 FSBisheadquarteredinColumbus,Georgia,withoperationsconcentratedinthecredit cardandmerchantservicesdivisioninWilson,NorthCarolina.27Ratherthanoperatetraditionalbrickandmortarbranches,thebankoperatesonabranchlessplatform,distributingitsproductsthroughtheInternet,directmail,andtelemarketingcalls.FSB’sbusiness modelincludesvariousbusinesslinesandoperatingsubsidiariesthatofferavarietyof productsandservices.28FSBreceiveda“Satisfactory”ratingatitsmostrecentCRA examinationconductedbytheOfficeof ThriftSupervision(“OTS),asof January3,2011. Thebankwasrated“Satisfactory”overall,withratingsof “LowSatisfactory”forthe 23 12U.S.C.§2903. 24 12U.S.C.§2801etseq. 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,66FederalRegister11,642at 11,665(2010). 26 OnecommenterrequestedthattheBB&Tacquisitionbeconditionallyapproved,assertingthata“Satisfactory” ratingforabankaslargeasBB&Twasunacceptableandthatthelargestretailbanksshouldallhave“Outstanding”ratingsforCRAperformance.ThiscommenteralsocriticizedBranchBankforitsfailuretomaintain aconsistent“Outstanding”CRArating.Thecommentercitedthefairlendingviolationsthatwerereportedin thePEforBB&T’s2008examination,notedabove,andBankAtlantic’sCRAperformanceasreasonswhya conditionalapprovalwouldbeappropriate. 27 ThebankwascharteredonApril1,2008,whenBB&TBankcardsCorporationconvertedfromaspecialpurposestatebanktoanFDIC-insuredfederalsavingsbank. 28 AtthetimeoftheCRAevaluation,thebusinesslinesandoperatingsubsidiariesthatcontributedtothethrift’s CRAperformancewereBB&TBankcards(“Bankcards”),SheffieldFinancial(“Sheffield”),andLiberty MortgageCorporation(“LMC”).Bankcardsissuedcreditcardproductstoconsumer,corporate,andsmall businessclientsandwastheFSB’slargestbusinessline.Sheffield,anationwidespecialtyinstallmentlender, financedconsumerandsmallbusinesspurchasesofsmall-ticketoutdoorequipment.LMCofferedavarietyof
LegalDevelopments:ThirdQuarter,2012 329 LendingTest,“Outstanding”fortheInvestmentTest,and“HighSatisfactory”fortheServiceTest.29 BankAtlanticreceiveda“NeedstoImprove”CRAratingatitsmostrecentCRAexaminationconductedbytheOTS,asof May24,2010.TheOTSexaminationnotedviolationsof theFederalTradeCommissionActdiscoveredduringthethrift’sconsumercompliance examinationthatinvolvedanautomatedoverdraftprotectionprogram. BB&TreportedthatithasreviewedBankAtlantic’spoliciesandprocedures,monitoring reports,trainingdeliveryandfrequency,andcompliancereports.BB&Thasdirectedits compliancestaff toworkwithbothBranchBankandBankAtlanticemployeestoensure thatBankAtlantic’soverdraftpracticescomplywiththeFDIC’sguidanceonoverdraftprotectionprograms.30BB&Thascommittedthatafterconsummationof theproposed merger,itwilladdressanydeficienciesinBankAtlantic’sCRAperformancebyimplementingBB&T’sexistingpoliciesandproceduresatthecombinedorganization.Thosepolicies andproceduresareconsideredsatisfactory.Tothatend,BB&TplanstobuildonBankAtlantic’sexistingCRAeffortsandprograms,includingidentifyingthehousing,smallbusiness,andcommunitydevelopmentneedsof eachassessmentarea;reviewingcommunity actionplans;andinterviewinglocalcommunity-basedorganizationleaderstodiscussthe needsof thecommunities. B.HMDAAnalysis Initsevaluation,theBoardhasconsideredtherecordsof BB&TandBankAtlanticincomplyingwithfairlendingandotherconsumerprotectionlaws.TheBoardhasreviewed HMDAdatareportedbyBranchBankandBankAtlantic.Acommenteropposedtheproposalbyalleging,basedon2010HMDAdatareportedbyBranchBankandBankAtlantic, thatbothinstitutionsengagedindiscriminatorytreatmentof minorityindividualsintheir homemortgagelending.ThecommenteralsoallegedthatBranchBankandBankAtlantic deniedthehomemortgageloanapplicationsof minorityborrowersmorefrequentlythan thoseof nonminorityapplicantsincertainmetropolitanstatisticalareas(“MSAs”).31 TheHMDAdataindicatethatin2010BranchBanksomewhatlaggedtheaggregatein thepercentageof applicationsreceivedfromAfricanAmericansandHispanicsandfrom minoritycensustractsbutwasconsistentwiththeaggregatewithrespecttothepercentage of applicationsitreceivedfromLMIcensustractsandLMIindividuals.Thepercentageof BranchBank’sloanoriginationswaslargelyconsistentwiththeaggregatewithrespectto itsloansinLMIcensustractsandtoLMIindividuals,butthebanklaggedtheaggregate withrespecttoitsloanstoAfricanAmericansandHispanicsandinminoritycensustracts. InthePortSt.LucieMSA,anareacitedbythecommenter,BranchBankreceivedand originatedveryfewapplicationsfromAfricanAmericansandHispanicsin2010.The BoardnotesthatBranchBankcurrentlyhasfourbranchesinthePortSt.LucieMSAand homepurchaseandrefinanceproducts,includingFHAandVAloans,thatwereoriginatednationwidethrough anetworkofmortgageoriginators.Residentialmortgageloansaccountedforlessthan1percentofFSB’sloan portfolio.DuetoachangeinFSB’sbusinessmodel,LMCceasedoperationsonJuly31,2010. 29 TheseratingsrepresentedFSB’sfirstCRAexamination,andthereviewperiodwasApril1,2008,thedatethe bankcommencedoperations,throughDecember31,2009. 30 BranchBank,whichwillsurvivethemergerwithBankAtlantic,isastatenonmemberbanksupervisedbythe FDIC. 31 TheBoardreviewed2008,2009,2010,andpreliminary2011HMDAdataforBranchBankinitscombined assessmentareas;inFlorida,Georgia,NorthCarolina,andVirginia(thestateswiththemajorityofthebank’s branchingnetwork);andinallareasidentifiedbythecommenter.TheBoardalsoreviewedBankAtlantic’s 2008,2009,2010,andpreliminary2011HMDAdataintheMSAscitedinthecomments,aswellasBankAtlantic’sHMDAlendingthroughoutitscombinedassessmentareas.
330 FederalReserveBulletin|December2012 enteredthemarketonlyrecently,inAugust2009,whenBB&TacquiredColonialBank, Montgomery,Alabama,inafailed-banktransactionwiththeFDIC. In2011,HMDAloanapplicationsfromAfricanAmericansandHispanicsinBranch Bank’scombinedassessmentareasincreasedslightlyfrom2010.TheBoardnotesthat, althoughthepercentageof BranchBank’soriginationstoAfricanAmericansin2011 remainedthesameasin2010,thepercentageof itsloanoriginationstoHispanics increasedslightly.Inaddition,BranchBank’sHMDAloanoriginationsinminoritycensus tracts,inLMIcensustracts,andtoLMIindividualsremainedsteadyorincreasedin2011. TheBoard’sreviewof BranchBank’sdenialdisparityratestoAfricanAmericanorHispanicapplicantsrelativetowhiteapplicants(denialdisparityratiosor“DDRs”)initscombinedassessmentareas,theStateof NorthCarolina(thebank’shomestate),theWinston- SalemMSA(thebank’sheadquarters),theStateof Florida,andtheMSAsidentifiedby thecommenter,indicatesthattheDDRswerelargelyconsistentwith,ormorefavorable than,thoseof theaggregatein2010. RegardingBankAtlantic,in2010thethrift’slendingsignificantlyexceededtheaggregate’s lendingwithrespecttothepercentageof itsloanstoAfricanAmericansandHispanics,in minorityandLMIcensustracts,andtoLMIindividuals.In2010,BankAtlantic’sDDRs forAfricanAmericansweremorefavorablethanthoseof theaggregateinallof thethrift’s combinedassessmentareas,aswellasintheareasof interesttothecommenter.ForHispanics,thethrift’sDDRswereconsistentwiththeaggregateinallof thethrift’scombined assessmentareas,aswellasinthetwoMSAscitedbythecommenter.In2011,theDDRs forAfricanAmericanandHispanicborrowerslargelymirroredthethrift’sperformancein 2010. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.AlthoughtheHMDA datamightreflectcertaindisparitiesintheratesof loanapplications,originations,and denialsamongmembersof differentracialorethnicgroupsincertainlocalareas,HMDA dataalonedonotprovideasufficientbasisonwhichtoconcludewhetherBranchBankor BankAtlantichasexcludedorimposedhighercostsonanygrouponaprohibitedbasis. TheBoardrecognizesthatHMDAdataalone,evenwiththerecentadditionof pricing information,provideonlylimitedinformationaboutthecoveredloans.32HMDAdata, therefore,havelimitationsthatmakethemaninadequatebasis,absentotherinformation, forconcludingthataninstitutionhasengagedinillegallendingdiscrimination. Becauseof thelimitationsof HMDAdata,theBoard’sconsiderationof thosedatahas takenintoaccountotherinformation,includingexaminationreportsthatprovideon-site evaluationsof compliancewithfairlendingandotherconsumerprotectionlawsandregulationsbyBB&Tanditslendingaffiliates.TheBoardhasalsoconsideredinformationprovidedbyBB&Taboutitscompliancerisk-managementsystemsandhasconsultedwiththe FDIC,theprimaryfederalsupervisorof BranchBank,andtheOCC,theprimaryfederal supervisorof BB&T’ssubsidiaryfederalsavingsbankandBankAtlantic. 32 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata.
LegalDevelopments:ThirdQuarter,2012 331 AlthoughtheHMDAdatasuggestthattheremaybeopportunitiesforBranchBankto improveitsoutreachandmortgagelendingtoAfricanAmericansandHispanicsandin minoritycommunities,theHMDAdata,absentotherinformation,arenotevidenceof discrimination.BranchBankissubjecttocontinuoussupervisionbyitssupervisoryagencies, andithasundergoneanumberof reviewsforcompliancewithconsumerprotectionand fairlendinglaws,regulations,andstatutessinceits2008CRAevaluation.Suchreviews incorporateadditionaldatabeyondtheHMDAdatareportedannuallyandincludereviews of loanfiles,thearticulatedpoliciesandproceduresof theinstitution,andassessmentsof thebank’sactualpractices.Thefairlendingreviewsincludeassessmentsof BranchBank’s underwriting,pricing,andadvertisingandmarketingprograms,andexaminershavefound noevidenceof discouragementordiscriminationonanyprohibitedbasis.Further,the BoardhasreviewedBranchBank’scomplianceprogramsandconferredwiththeFDIC. TheBoardconcludesthatBranchBank’smortgagelendingoperationsandcompliance programsaresufficienttoensurecompliancewithfairlendingandotherconsumerprotectionlaws.Inaddition,theBoardnotesthatthisproposalisdesignedtoroundoutBranch Bank’spresenceincertainmarketsandfindsthatthebankiswellpositionedtotakeadvantageof theopportunitiespresentedtoenhanceitsmortgagelendingeffortswithrespectto traditionallyunderservedracialandethnicmarketsegments. TheBoardhasconsideredallthefactsof record,includingtheCRAperformancerecords of theinstitutionsinvolved,informationprovidedbyBB&T,commentsreceivedonthe proposalandresponsestothosecomments,andconfidentialsupervisoryinformation. Basedonareviewof theentirerecord,andforthereasonsdiscussedabove,theBoardconcludesthatconvenienceandneedsconsiderations,includingtheCRAperformancerecords of therelevantinsureddepositoryinstitutions,areconsistentwithapprovalof theproposal. Moreover,theadoptionof BB&T’spoliciesandproceduresintoBankAtlantic’soperations islikelytohelpimproveoverallCRAcompliance. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct.33 FinancialStabilityStandard Inreviewingproposalsundersection4of theBHCAct,theBoardexpectsthatitwillgenerallyfindasignificantadverseeffectif thefailureof theresultingfirm,oritsinabilityto conductregular-course-of-businesstransactions,wouldlikelyimpairfinancialintermediationorfinancialmarketfunctioningsoastoinflictmaterialdamageonthebroader economy.Thatkindof damagecouldoccurinanumberof ways,includingseriouslycompromisingtheabilityof otherfinancialinstitutionstoconductregular-course-of-business transactionsorseriouslydisruptingtheprovisionof creditorotherfinancialservices. Toassessthelikelihoodthatfailureof theresultingfirmmayinflictmaterialdamageonthe broadereconomy,theBoardwillconsideravarietyof metricsthatcapturethesystemic “footprint”of themergedfirmandwillalsoconsidertheincrementaleffectof thetransactiononthesystemicfootprintof theacquiringfirm.Thesemetricswouldincludemeasures of thesizeof theresultingfirm;availabilityof substituteprovidersforanycriticalproducts 33 Dodd-FrankAct,§604(e),codifiedat12U.S.C.§1843(j)(2)(A).OtherprovisionsoftheDodd-FrankAct imposeasimilarrequirementthattheBoardconsiderorweightheriskstofinancialstabilityposedbyamerger, acquisition,orexpansionproposalbyafinancialinstitution.Seesections163,173,and604(d)and(f)ofthe Dodd-FrankAct.
332 FederalReserveBulletin|December2012 andservicesofferedbytheresultingfirm;interconnectednessof theresultingfirmwiththe bankingorfinancialsystem;theextenttowhichtheresultingfirmcontributestothecomplexityof thefinancialsystem;andtheextentof thecross-borderactivitiesof theresulting firm.34Thesecategoriesarenotexhaustive,andadditionalcategoriescouldinformthe Board’sdecision.35Inadditiontothesequantitativemeasures,theBoardwillconsider qualitativefactors,suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingtheresulting firm.Afinancialinstitutionthatcanberesolvedinanorderlymannerislesslikelytoinflict materialdamagetothebroadereconomy.36 Analysisof theFinancialStabilityImpactof thisProposal Inthiscase,theBoardhasevaluatedtheforegoingmetricstodeterminewhethertheproposalpresentsasignificantrisktothestabilityof theU.S.bankingorfinancialsystem.The Boardalsohasconsideredtherelativedegreeof difficultyof resolvingtheresultingfirm. TheBoardreviewedpubliclyavailabledata,datacompiledthroughthesupervisoryprocess, anddataobtainedthroughinformationrequeststotheinstitutionsinvolvedintheproposal,aswellasqualitativeinformation. ThistransactionwouldincreaseBB&T’ssystemicfootprintbyonlyanegligibleamount and,therefore,wouldnotraisefinancialstabilityconcerns.BB&Twouldcontrol1.4percentof thetotalU.S.depositsafterthetransaction,placingitwellwithinthe10percent limitationontotalU.S.deposits.Theproposedtransactionwouldincreasethefirm’ssize anddegreeof interconnectednesswithotherfinancialinstitutions,andcontributetocomplexityof thefinancialsystem,byaninsignificantamount.Furthermore,neitherBB&T norBankAtlantichasmarketsharesthataresufficientlylargetosuggesttheyaremajor providersof anycriticalfinancialservices.Consequently,theacquisitiondoesnotraiseconcernsaboutapotentiallackof substituteprovidersforsuchservices. Inaddition,thestructureandoperationof thecombinedorganizationwouldbecentered onaconventionalcommercialbankingbusiness.Intheeventof distress,theresolutionprocesswouldbehandledinapredictablemannerbyrelevantauthorities.Thecombinedfirm wouldnotexhibitahighdegreeof organizationalorlegalcomplexityandwouldhave limitedengagementincross-borderactivities,furthersuggestingthatresolutionof thecombinedorganizationintheeventof itsfailurewouldnotinvolvealevelof cost,time,ordifficultythatwouldjeopardizethestabilityof theUSFS. Basedontheseandalltheotherfactsof record,theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. 34 Alargevalueofametricforanyonecategorymaysuggestthatdistressattheresultingfirmislikelytoresultin materialdamagetothebroadereconomy.ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financialsystem(“USFS”).Forexample,theproformaassetsizeofthe resultingfirmisexpressedintermsoftheresultingfirm’sproformaassetsasashareoftotalassetsofthe USFS.Forthispurpose,theUSFScomprisesallU.S.financialinstitutionsusedincomputingtotalliabilities forthepurposesofcalculatingthelimitationonliabilitiesofafinancialcompanyrequiredundersection622of theDodd-FrankActandincludesU.S.-basedbankandnonbankaffiliatesofforeignbankingorganizations.In connectionwithitssupervisionofnonbankfinancialinstitutionsthattheFinancialStabilityOversightCouncildeterminescouldposeathreattothefinancialstabilityoftheUnitedStates,theBoardmayrequirefinancial andotherreportingbytheseinstitutions,whichwouldincreasethepoolofavailabledataforfinancialstability analyses.Seesections113and151oftheDodd-FrankAct,codifiedat12U.S.C.§§5323and5341,respectively. 35 Themetricsfortheresultingentityarenot,bythemselves,determinative.TheBoardwilltakeintoaccountall factorsthatarerelevanttoatransaction,someofwhichmaynotbecapturedbythemetrics. 36 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).
LegalDevelopments:ThirdQuarter,2012 333 PublicBenefits Asnoted,theBoardisrequiredtoconsiderwhethertheproposedacquisitionof BankAtlantic“canreasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects, suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingor financialsystem.”37 TheBoardhasreviewedtheabovecriteriainlightof therecordinthiscase.Overall,the recordindicatesthatconsummationof theproposalwouldresultinadditionalbenefitsto consumerscurrentlyservedbyBankAtlantic.TheproposalwouldallowBB&Ttoexpand therangeof financialproductsandservicesavailabletoexistingcustomersof BankAtlantic.Aftertheacquisition,BankAtlanticcustomerswouldbenefitfromBranchBank’s higherlegallendinglimit,anexpandedrangeof commercialandconsumerloanproducts,a fullrangeof cashmanagementservices,awidervarietyof mortgageloanproducts,and accesstoBranchBank’scorporate,personal,andemployeebenefittrustservices,insurance, andinvestmentservices.Inaddition,BankAtlanticcustomerswouldhaveaccesstoBranch Bank’sbranchlocationsandATMnetworkthroughoutFloridaandtheSoutheastern UnitedStates.BB&ThascommittedtocorrectBankAtlantic’sdeficiencieswithrespectto overdraftsincustomeraccountsandtoimproveBankAtlantic’sprocesses,procedures,and practicesforcompliancewiththeCRA.Theproposalwouldprovidetheopportunityfor significantoperationalefficienciesforthecombinedorganization,andBB&Texpectsto realizesignificantcostsavingsfromconsolidatingsystems,platforms,andcorporatestaff functions. Basedonallthefactsof record,includingthecommitmentsandconditionsnotedinthis case,theBoardhasconcludedthatconsummationof theproposalcanreasonablybe expectedtoproducepublicbenefitsthatwouldoutweighanylikelyadverseeffects.Accordingly,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunderthestandard of section4(j)(2)of theBHCActisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.38Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyBB&Twith theconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwiththenotice.TheBoard’sapprovalalsoissubjecttoalltheconditionssetforthin 37 12U.S.C.§1843(j)(2)(A). 38 AcommenterrequestedthattheBoardholdapublichearingontheproposal.TheBoard’sregulationsprovide forahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissuesofmaterialfactthat cannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoardalsomay,inits discretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevant testimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsideredthe commenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnotidentifydisputedissuesoffactthatare materialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublichearing.Inaddition,therequestdoes notdemonstratewhythewrittencommentsdonotpresentthecommenter’sviewsadequatelyorwhyahearing otherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoard hasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestfora publichearingontheproposalisdenied.
334 FederalReserveBulletin|December2012 RegulationY,includingthoseinsections225.7and225.25(c),39andtotheBoard’sauthoritytorequiresuchmodificationorterminationof theactivitiesof abankholdingcompany oranyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andto preventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandorders issuedthereunder.Forpurposesof thisaction,theseconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theacquisitionshallnotbeconsummatedlaterthanthreemonthsaftertheeffectivedate of thisorder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederal ReserveBankof Richmond,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJuly31,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. RobertdeV.Frierson DeputySecretaryof theBoard Order Issued Under Bank Merger Act Five Star Bank Warsaw, New York OrderApprovingtheAcquisitionof Branches FRBOrderNo.2012–7(July27,2012) FiveStarBank(“FiveStar”),Warsaw,NewYork,1astatememberbank,hasappliedunder section18(c)of theFederalDepositInsuranceAct2(“BankMergerAct”)toacquirefour branchesof HSBCBankUSA,NationalAssociation(“HSBC”),McLean,Virginia(“New YorkBranches”),thatFirstNiagaraBank,NationalAssociation(“FirstNiagara”),Buffalo,NewYork,contractedtopurchasefromHSBC.3FiveStaralsohasappliedundersection9of theFederalReserveAct4(“FRA”)toestablishbranchesatthefourbranchlocations.5 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.6AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof the mergerwasrequestedfromtheUnitedStatesAttorneyGeneralandacopyof thatrequest wasprovidedtotheFederalDepositInsuranceCorporation(“FDIC”).Thetimeforfiling commentshasexpired,andtheBoardhasconsideredtheapplicationsandallcomments receivedinlightof thefactorssetforthintheBankMergerActandtheFRA. 39 12CFR225.7and225.25(c). 1 FiveStarisasubsidiaryofFinancialInstitutions,Inc.,alsoofWarsaw,afinancialholdingcompany. 2 12U.S.C.§1828(c). 3 FirstNiagaraacquiredtherighttopurchasetheNewYorkBranchesaspartofitsproposaltoacquire195 HSBCbranchesinNewYorkandConnecticut.TheOfficeoftheComptrolleroftheCurrency(“OCC”) approvedFirstNiagara’sproposalonApril19,2012. 4 12U.S.C.§321. 5 Thoselocationsarelistedintheappendix. 6 12CFR262.3(b).
LegalDevelopments:ThirdQuarter,2012 335 FiveStaristhe40thlargestinsureddepositoryinstitutioninNewYork,controllingdepositsof approximately$2.2billion,whichrepresentlessthan1percentof thetotalamountof depositsininsureddepositoryinstitutionsinNewYork(“statedeposits”).7FiveStarproposestoacquire$217millionintotaldepositsfromFirstNiagara,representinglessthan 1percentof statedeposits.Onconsummationof theproposal,FiveStarwouldbecomethe 37thlargestinsureddepositoryinstitutioninNewYork,controllingdepositsof $2.4billion,representinglessthan1percentof statedeposits. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.8TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.9 FiveStarandtheNewYorkBranchescompetedirectlyintheNewYorkbankingmarkets of Elmira-CorningandRochester.10TheBoardhasreviewedthecompetitiveeffectsof the proposalinthosebankingmarketsinlightof allthefactsof record.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets,therelativeshareof thetotaldepositsininsureddepositoryinstitutionsinthemarket (“marketdeposits”)thatFiveStarwouldcontrol,11theconcentrationlevelsof market depositsandtheincreaseinthoselevelsasmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”),12andothercharacteristicsof themarkets. 7 DataareasofJune30,2011,andreflecttheacquisitionbyFiveStaroffourotherFirstNiagarabrancheson June22,2012.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks, andsavingsassociations. 8 12U.S.C.§1828(c)(5)(A). 9 12U.S.C.§1828(c)(5)(B). 10 TheElmira-CorningbankingmarketisdefinedasChemungCounty;Cayuga,Dix,Montour,Orange,Reading, andTyronetownshipsinSchuylerCounty;andAddison,Bath,Bradford,Cameron,Campbell,Caton,Corning,Erwin,Hornby,Jasper,Lindley,Rathbone,Thurston,Troupsburg,Tuscarora,Urbana,andWoodhulla townshipsinSteubenCounty,allinNewYork. TheRochesterbankingmarketisdefinedasGenesee,Livingston,Monroe,Ontario,Seneca,Wayne,andYates Counties;Alfred,Allen,Almond,Andover,Angelica,Birdsall,Burns,Granger,Grove,Hume,Independence, andWestAlmondtownshipsinAlleganyCounty;Albion,Barre,Carlton,Clarendon,Gaines,Kendall,and MurraytownshipsinOrleansCounty;Avoca,Canisteo,Cohocton,Dansville,Fremont,Greenwood,Hartsville, Hornellsville,Howard,Prattsburg,Pulteney,Wayland,Wayne,WestUnion,andWheelertownshipsinSteuben County;andCastile,Covington,Gainesville,GeneseeFalls,Middlebury,Perry,Pike,andWarsawtownshipsin WyomingCounty,allinNewYork. 11 IntheRochesterbankingmarket,depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryofdepositsdataasofJune30,2011,andarebasedoncalculationsinwhich thedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991).NosavingsassociationsoperateintheElmira-Corningbankingmarket. 12 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontalMerger
336 FederalReserveBulletin|December2012 IntheRochesterbankingmarket,consummationof theproposalwouldbeconsistentwith BoardprecedentandwithinthethresholdsintheDOJBankMergerGuidelines.Onconsummationof theproposal,theRochesterbankingmarketwouldremainunconcentrated, asmeasuredbytheHHI,andnumerouscompetitorswouldremaininthebankingmarket.13 FiveStaristhefifthlargestinsureddepositoryinstitutionintheElmira-Corningbanking market,controllingdepositsof approximately$191million,whichrepresentapproximately 11percentof marketdeposits.14HSBCisthefourthlargestinsureddepositoryinstitution inthemarket,controllingdepositsof approximately$246million,whichrepresentapproximately14.1percentof marketdeposits.FiveStarproposestoacquire$173millionof those deposits,representing9.9percentof marketdeposits.15Onconsummationof theproposal, FiveStarwouldbecomethesecondlargestdepositoryinstitutionintheElmira-Corning bankingmarket,controllingdepositsof approximately$364million,whichwouldrepresent 21.8percentof marketdeposits.TheHHIwouldincrease324points,from2188to2512. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitioninthemarket.16Inthismarket,thereareseveralsuchfactors.Onconsummation,eightotherinsureddepositoryinstitutions,includingthreeinstitutionsthateachcontrolmorethan10percentof marketdeposits,wouldcontinuetooperateinthemarket, includingthemarket’slargestcompetitor,ChemungCanalTrustCompany,with35.9percentof marketdeposits. Additionally,ninecreditunionsoperatebranchesinthemarket.Onecreditunion,First HeritageFederalCreditUnion(“FirstHeritage”),exertsasignificantcompetitiveinfluence intheElmira-Corningbankingmarket.17FirstHeritageoffersawiderangeof consumer products,operatesstreet-levelbranches,andhasmembershipopentoalmostalltheresidentsinthemarket.FirstHeritage’sactivitiesinthisbankingmarketexertasufficiently competitiveinfluencetomitigate,inpart,thepotentialcompetitiveeffectsof theproposal. WhenFirstHeritage’sdepositsareconsideredona50percentweightedbasis,FiveStar wouldcontrolapproximately20percentof themarketdepositsonconsummationof the proposal,andtheHHIwouldincrease267points,from1924to2191. Guidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/ 10-at-938.html. 13 IntheRochesterbankingmarket,FiveStaroperatestheseventhlargestinsureddepositoryinstitution,controllingdepositsofapproximately$1.2billion,whichrepresent7percentofmarketdeposits.ThebranchFiveStar proposestoacquirecurrentlycontrols$61millionindeposits,butFiveStarwouldacquireonly$44millionof thebranch’sdeposits.Afterconsummation,FiveStarwouldremaintheseventhlargestinsureddepository institutioninthemarket,controllingdepositsofapproximately$1.3billion,whichrepresent8.1percent ofmarketdeposits.TheHHIwoulddecreaseby6points,from1079to1073,duetoFirstNiagara’slargepresenceinthatbankingmarket.Onconsummationoftheproposal,24competitorswouldremaininthemarket. 14 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2011,andreflecttheacquisitionbyCommunityBank,N.A.,DeWitt,NewYork,of anHSBCbranchintheElmira-Corningbankingmarket. 15 TheproposedacquisitioncontemplatesHSBCretaining$73millionindeposits.HSBCwouldnotretainan officeintheElmira-Corningmarket,andthosedepositswouldbetransferredoutofthemarket. 16 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 17 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionsasamitigatingfactor.See, e.g.,TheToronto-DominionBank,96FederalReserveBulletinB36(2010);RegionsFinancialCorporation,93 FederalReserveBulletinC16(2007);WachoviaCorporation,92FederalReserveBulletinC183(2006);F.N.B. Corporation,90FederalReserveBulletin481(2004).
LegalDevelopments:ThirdQuarter,2012 337 TheElmira-Corningbankingmarkethasothercharacteristicsthatalsotendtomitigate potentiallyadversecompetitiveeffects.Overthethreeyearperiodendingin2010,income inthemarkethasgrownfasterthanthestateandnationalaveragesformetropolitanstatisticalareasandnonmetropolitancounties.TheElmira-Corningbankingmarketalsohas experienceddenovoentryinthelastfiveyears. TheDOJconductedareviewof thepotentialcompetitiveeffectsof theproposalandhas advisedtheBoardthatconsummationwouldnotbelikelytohaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theFDIChasbeen affordedanopportunitytocommentandhasnotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheElmira-CorningandRochesterbankingmarkets,orinanyotherrelevant bankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderations areconsistentwithapproval. Financial,Managerial,andOtherSupervisoryFactors InreviewingthisproposalundertheBankMergerActandtheFRA,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutions involvedandtheorganization’snonbankingoperations.Initsevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,andearningsprospects,andtheimpactof the proposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapital adequacytobeespeciallyimportant. FiveStariswellcapitalizedandwouldremainsoonconsummationof theproposal.The proposedtransactionisstructuredasacashpurchaseof assets,andFiveStarwillfundthe purchasefromexistingresources.Theproposalwouldnotnegativelyaffectassetquality, andfutureprospectsareconsideredconsistentwithapproval.Basedonitsreviewof the record,theBoardfindsthattheorganizationhassufficientfinancialresourcestoeffectthe proposal. TheBoardalsohasconsideredthemanagerialresourcesof FiveStarandreviewedthe examinationrecordsof FiveStar,includingassessmentsof itsmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandFiveStar’srecordsof compliancewithapplicablebankingandanti-moneylaunderinglaws.TheBoardalsohasconsideredFiveStar’splansforimplementingthe proposal.FiveStarisconsideredtobewellmanagedanditsboardof directorsandsenior managementhavesignificantcommunitybankingexperience.FiveStarwouldoperatethe acquiredbranchesunderitsexistingpoliciesandprocedures,whichareconsideredtobe adequate. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof FiveStarareconsistentwith approval,asaretheothersupervisoryfactors.
338 FederalReserveBulletin|December2012 ConvenienceandNeedsConsiderations TheBankMergerActalsorequirestheBoardtoconsidertheconvenienceandneedsof the communitiestobeservedandtotakeintoaccounttherecordsof therelevantdepository institutionsundertheCommunityReinvestmentAct(“CRA”).18TheCRArequiresthe federalfinancialsupervisoryagenciestoencouragefinancialinstitutionstomeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankacquisition proposals.Accordingly,theBoardhasconsideredtheconvenienceandneedsfactorandthe CRAperformancerecordsof FiveStarandHSBCinlightof allthefactsof record. AsprovidedintheCRA,theBoardhasevaluatedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof theCRAperformancerecords of therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailedon-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.19 FiveStarreceivedanoverallratingof “outstanding”atitsmostrecentCRAperformance examinationbytheFederalReserveBankof NewYork,asof August2011.Examiners notedthat9branches,representing18percentof FiveStar’s49existingbranches,werein LMIareas.Examinersdeterminedthatthisdistributionof branchescomparedfavorably withthepercentageof thepopulationinthebank’sassessmentarearesidinginLMItracts (6percent).Asaresultof thisproposal,FiveStarwouldoperate53branches,of which11 branches,or20percent,willbeinLMIareas.Further,threeof thebrancheswillbeinareas thatarenotcurrentlypartof FiveStar’sassessmentarea,andoneof thethreebranches willbeinanLMIarea.HSBCreceivedanoverallratingof “outstanding”atitsmostrecent CRAperformanceexaminationbytheOCC,asof October2009. Thisproposalwouldresultincustomersof thefourbranchescontinuingtohaveaccessto bankingservicesintheirimmediatecommunities.Inthreeinstances,existingFiveStar brancheswillbeconsolidatedwiththreeNewYorkBranches,andthoseconsolidationswill occurwithinthesamecensustract.Intwoof theconsolidations,thedistancebetweenthe branchesinvolvedislessthanonemile.Intheremainingconsolidation,thebranchesare within1.2milesof eachother.20 Basedonallthefactsof recordandforthereasonsdiscussedabove,theBoardconcludes thatconsiderationsrelatingtoconvenienceandneeds,includingtheCRAperformance recordsof therelevantdepositoryinstitutions,areconsistentwithapprovalof theproposal. 18 12U.S.C.§2901etseq. 19 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642at 11,665(2010). 20 TheBoardhasconsideredthatfederalbankinglawprovidesaspecificmechanismforaddressingbranchclosings.Section42oftheFederalDepositInsuranceAct,12U.S.C.§1831r-1,asimplementedbytheJointPolicy StatementRegardingBranchClosings(64FederalRegister34,844(1999)),requiresthatabankprovidethe publicwithatleast30days’notice,andtheappropriatefederalsupervisoryagencyandcustomersofthe branchwithatleast90days’notice,beforethedateoftheproposedbranchclosings.Thebankalsoisrequired toprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyfor branchclosings.FiveStarhascompliedwiththoserequirements.
LegalDevelopments:ThirdQuarter,2012 339 FinancialStability TheBoardhasconsideredinformationrelevanttorisktothestabilityof theUnitedStates bankingorfinancialsystem.Theproposedacquisitionrepresentsademinimistransaction forfinancialstabilitypurposes,andtheproposedtransactionwouldnotmateriallyincrease theinterconnectednessorcomplexityof FiveStar.TheBoard,therefore,concludesthat financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Establishmentof Branches Asnoted,FiveStarhasappliedundersection9of theFRAtoestablishbranchesatthe locationsof theNewYorkBranches,andtheBoardhasconsideredthefactorsitis requiredtoconsiderwhenreviewinganapplicationunderthatsection.21Specifically,the BoardhasconsideredFiveStar’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,and investmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfindsthose factorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyFiveStarwithallthecommitmentsmadeinconnectionwiththisproposal andtheconditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedto beconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Acquisitionof thebranchesmaynotbeconsummatedbeforethefifteenthcalendarday aftertheeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederal ReserveBankof NewYork,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJuly27,2012. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsDuke, Tarullo,Raskin,Stein,andPowell. RobertdeV.Frierson DeputySecretaryof theBoard Appendix NewYorkBranchestoBeAcquired 1. 150LakeStreet,Elmira14901 2. 309S.MainStreet,Horseheads14845 3. 217PrescottAvenue,ElmiraHeights14903 4. 102N.MainStreet,Albion14411 21 See12U.S.C.§322;12CFR208.6.
340 FederalReserveBulletin|December2012
341 Federal Reserve BULLETIN Index A Brevoort,KennethP.,article,129–174 Affordablehousing,205,236 Bricker,Jesse,article,29–60 Annualpercentagerate(APR),144, Bureauof EconomicAnalysis(BEA),2 149–150,160 C Anti-moneylaundering,187,194,225,228, Cai,Fang,article,1–15 234,274 CAMELratingsystem,270,294 Avery,RobertB.,article,129–174 Canner,GlennB.,article,129–174 B ChicagoSun-Times,291 Balanceof PaymentsandInternational ChinaBankingRegulatory InvestmentPositionManual,13 Commission,266,283 BankHoldingCompanyAct,ordersissued ChinaFinancialStabilityReport,290,299 under ChinaInsuranceRegulatoryCommission AdamBankGroup,Inc.,231–237 (CIRC),272,286 BancodoBrasil,S.A.,185–191 ChinaSecuritiesRegulatory BancorpRhodeIsland,Inc.,191–193 Commission,272,286 Bankof EastAsia,263 ChineseAccountingStandards(CAS),285, BankAtlantic,323–333 295 BB&TCorporation,323–333 CommunityReinvestmentAct(CRA),131, BrazosValleyBank,231 189,194,221,234,338 BrooklineBancorp,191–194 ConsumerFinancialProtectionBureau,33, CaixadePrevidênciadosFuncionarios 129,164 doBancodoBrasil,185 Cousinv.OTS,306 CapitalOneFinancial Credit Corporation,237–259 Card,83,94–95 CentralHuijinInvestmentLtd.,263–274 Insurance,175–178 ChinaInvestmentCorporation,263 D EuroBank,185–190 DebtCollectionImprovementAct,110 GoeringManagementCompany, Departmentof HousingandUrban LLC,195 Development(HUD),158,240 GreenDotCorporation,213–214,218 HanaFinancialGroup,Inc.,260–262 Departmentof JusticeBankMerger IndianaCommunityBancorp,317–318 CompetitiveReviewguidelines,197, IndustrialandCommercialBankof 202,220,233,318,335 China,263,280 Departmentof Justice(DOJ),197,221,240, KEBNYFinancialCorp.,260–262 319,326 OldNationalBancorp,317–322 Departmentof theTreasury PNCFinancialServicesGroup, FinancialManagementService,110 Inc.,200–209 Dodd-FrankWallStreetReformand RBCBank,200–205 ConsumerProtectionAct WestpacBankingCorporation,210–213 (Dodd-Frank),33,165,205,211,240, BankMergerAct,ordersissuedunder 253,279,300,324,331 CroghanColonialBank,219 Durkin,ThomasA.,article,175–184 FiveStarBank,334–339 E HomeSavingsandLoanCompany,219 EFT‘99,110 HSBCBank,334 BaselCommitteeonBankingSupervision ElectronicFundTransferAct,111 BaselCorePrinciplesforEffective Elliehausen,Gregory,article,175–184 BankingSupervision,268,282 Emergingmarketeconomies(EME),9 BaselICapitalAccord,267,285 EurasianGroup,275,288,298 Bhutta,Neil,article,129–174 Brandner,Erika,article,1–15
342 FederalReserveBulletin|Index F InternationalFinancialReporting FannieMae,140,141 Standards(IFRS),270,285,294 FarmerMac,141 InternationalMonetaryFund(IMF),228, FederalDepositInsuranceAct(FDI 296 Act),301,302,305–306,308 J FederalDepositInsuranceCorporation Judson,Ruth,article,1–15 (FDIC),111,172,186,194,199,235, 266 K FederalFinancialInstitutionsExamination Kennickell,ArthurB.,article,29–60 Council(FFIEC),129,150,169 FederalHousingAdministration L (FHA),130,142,251 Lending FederalRegister,185,192,196,210,214, Fair,163,167,251 231,238,260,263,317,323 Homepurchase,133–136,154 FederalTradeCommissionAct,329 Non-owner-occupant,136,142 FinancialActionTaskForce(FATF),225, Litigation,enforcementdecision 275,288 FirstNationalCommunity FinancialStabilityBoard,272 Bancorp,301–314 Financialsystemstabilityassessment,272, Loan-to-value(LTV)ratios,142,163 296 Low-to-moderateincomes,112,131 First-timehomebuyertaxcredit M program,134,236 MellonBank,N.A.v.AetnaBusinessCredit, FloridaOfficeof FinancialRegulation Inc.,309 (FOFR),186 MetropolitanNewYorkbanking ForeignBankSupervisionEnhancement market,266 Act,223,281,291 MiamiDailyBusinessReview,223 Foreignholdings,3,10 Mobilebanking FreddieMac,135,140,141 Phone,117,124 G Smartphones,117,120 GinnieMae,141 Textmessage,121 GovernmentAccountabilityOffice Moneylaundering,188,203,209,225,228, (GAO),180 266,269–275 Government-ownedinvestment Moore,KevinB.,article,29–60 company,264 MortgageInsuranceCompaniesof Gross,MatthewB.,article,109–122 America,139 Mortgage H Denialrates,131,145,162 HardestHitFund(HHF),251 Fixed-rate,32,258 Herfindahl-HirschmanIndex(HHI),196, Market,129,151 202,220,233,326 Originations,130,133,141,151 Hogarth,JeanneM.,article,109–122 HomeAffordableModificationProgram N (HAMP),251 NationalAssociationof Realtors,135 Homeequitylineof credit,88,140 NationalBankAct,178,300 HomeMortgageDisclosureAct NationalBureauof EconomicResearch,32 (HMDA),129–136,144–145,162, NeighborhoodStabilizationProgram 164–167,235,245,250–251,277,278, (NSP),131,158 279,328 HomeOwnershipandEquityProtection O Actof 1994(HOEPA),144,151 Officeof AttorneyGeneralof Florida,217 HomeOwners’LoanAct,306 Officeof theComptrollerof the Homeownership,30–39,51,74–77,85–90 Currency,178,266 HousingandEconomicRecoveryAct,158 Officeof ThriftSupervision,194 Offshorefinancialcenters,4 I OrganisationforEconomicCo-operation InsideMortgageFinance,152 andDevelopment,228 InternationalBankingAct,ordersissued under P AgriculturalBankof China PretrialJusticeInstitute,PretrialDiversion Limited,281–290 andtheLaw:ASamplingofFour BancodoEstadodoRioGrandedoSul DecadesofAppellateCourtRulings, S.A.,223 V-2-6,313 Bankof ChinaLimited,291,300 PrimaryMortgageMarketSurvey Bankia,S.A.,226 (PMMS),161
Index 343 Privatemortgageinsurance(PMI) SocialSecurityAdministration,32 Junior-lienloan,140–151 StateAdministrationforForeign Piggybackloan,140 Exchange,272,286 Profileof the2011HMDAData,131 SurveyResearchCenter(SRC)of the Universityof Michigan,179 R Refinance,135,141 T RegulationC,173 Taylorv.UnitedStates,308 RegulationE,252 TheNewYorkPost,281 RegulationK,185,224,264,282,292 TreasuryInternationalCapital(TIC) RegulationY,210,213,217,237,260,262, reportingsystem 323 Annualsurvey,2 RegulationZ,252 TICS,3–11 Related-partytransactions,271 TICSLT,1–2,11,24 Riegle-NealInterstateBankingand TroubledAssetRelief Program,32,251 BranchingEfficiencyActof TruthinLendingAct(TILA),111,178,252 1994,300 RuralHousingService(RHS),136 U U.S.CensusBureau,33–35,166–169 S USDAFarmServiceAgency(FSA),136 Sabelhaus,John,article,29–60 UtahDepartmentof FinancialInstitutions Savingsbonds,59 (UtahDFI),215 Schmeiser,MaximilianD.,article,109–122 Shortsales,136 W Single-borrowercreditlimits,271,286,295 WorldBankFindex,117
Cite this document
Federal Reserve (2011, December 31). Federal Reserve Bulletin, 2012-01. Bulletin, Federal Reserve. https://whenthefedspeaks.com/doc/bulletin_201201
@misc{wtfs_bulletin_201201,
author = {Federal Reserve},
title = {Federal Reserve Bulletin, 2012-01},
year = {2011},
month = {Dec},
howpublished = {Bulletin, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bulletin_201201},
note = {Retrieved via When the Fed Speaks corpus}
}